Traditionally, the engineering line of business has been profitable for the longest time in South Africa (SA) and that has attracted new entrants into the market in their effort to diversify their book of business and have a share of the profits. This has provided excess capacity into the market which fuels competition resulting in the fall of the premium rates. To date, the biggest challenges facing the market are the low premium rates, wider scope of coverage and the increase in the risk complexity compounded by the delay in start up cover requests. The increased competition comes at a time when the premium rates have been under pressure for a long time.
There has been renewed hope of a market hardening following the Global Natural Catastrophes (NatCat) events of 2017 including our local Nat Cat events i.e. WestRand Storms, Durban Floods, and Knysna Fires. In the recent renewal discussions, the property market saw a change towards a hard market whereby capacity was reduced and strict underwriting terms applied. This was more prevalent on the fire policies and in response to combination of the NatCat claims burden as well as the big fire market losses. In essence it is fair to say there has been a positive shift in the SA Fire market but to what extent has that been possible in the Engineering market?
Generally, natural catastrophes have been the biggest drivers in changing the market from soft to hard. From the SA engineering perspective, the NatCat loss impact has been inadequate to change the engineering underwriter’s appetite and to some extent has not been severe to cause wide spread damage on engineering projects. The other driver is usually a large market loss, for example, a boiler explosion followed by business interruption. The SA engineering market has also been spared because of its gearing towards underwriting pure construction business with a little bit of machinery breakdown as the operational power plant occupancy typically resides in the Property policies and not the Engineering policies. In other parts of the world, power business is accounted for in the engineering book.
How about occurrences arising out of the big construction undertakings from the likes of Gautrain, Eskom Mega Projects (Kusile, Medupi, Ingula)? Again, the local engineering underwriter is somehow not affected as the bulk of the capacity on these policies was provided by the international market with the local market having an insignificant exposure. There have been significant losses on these projects which have not affected the SA engineering market due to its low participation levels.
As detailed above, the SA engineering market has low NatCat exposure claims and has not suffered a large market loss similar to what property underwriters have experienced. In the absence of big losses, the engineering market is an attractive line of business and will continue to attract more entrants creating fierce competition resulting to a fall of the premium rates until such a time a big loss occurs.
For more information, contact:
Mr Philani Mbatha