Regulatory update - Insurability and uninsurability

The increasing frequency of devastating and even catastrophic events has given rise to a worldwide debate on the role of insurers in helping to manage the risks and losses of those insured or seeking insurance.

The debate starts at the level of the policyholder in physically managing their risks by designing and locating buildings and securing their properties against climate-related events. This need not be done in isolation. Insurers are increasingly using their loss-related data and technology to assist their clients and potential clients. However the competition authorities need to allow insurers to aggregate their risk data to greater effect.

The insurance industry is dealing with the issue because corporations are increasingly seeking ways of managing their risks other than through conventional insurance. The recent expanded demand for captive insurance is a good example. Jurisdictions around the world are responding to this demand. However captive insurance does not take the issue outside the insurance sphere. Captives are highly depend on reinsurance.

A recent phenomenon is insurance-linked securities, which are financial instruments and not insurance policies. These instruments enable investors to invest in the outcomes of a number of policies covering low probability but high loss risks, such as natural disasters. These investments also rely on the active role of reinsurers. Although risky, the returns for the investors are high if no catastrophe events occur before the maturity date of the investment. If such events occur, insurers have access to additional funds to pay claims.

None of the solutions can meet the extent of the risks entirely. The reliance on reinsurance is essential because reinsurance companies can spread their catastrophe risks. The risks can be spread over a large number of policies, a wide variety of insured perils, and a number of geographic areas in which the risks are run.

Although the frustration of the insuring public is understandable, the nature of insurance has to be recognised. Insurers, reinsurers and investors are commercial and not social entities. No-one will invest in an insurer or reinsurer, nor will a regulatory authority permit risk carriers, that are not generating profits rather than losses. The insurance industry does not indemnify risks without pooling risks. Bearing catastrophe risks is no different from any other risks. Prudent underwriting is required. It also does not help if, as is happening in some catastrophe-struck states in the USA, regulators oblige insurers to take on certain unacceptable risks, or not to increase premiums. That does not create a sustainable insurance industry.

Catastrophe risk can be covered at a price, but the price itself has to be commercially acceptable. High prices that drive more people out of the market are of no use to anyone. Risk management is everyone's problem.

Patrick Bracher
Norton Rose Fulbright South Africa
March 2025