The insurance sector may not seek out glitz and glamour but it does recognise the important role it has in the economic cycle.

In so many subtle ways, insurance impacts much of what goes on in our daily lives. The sector gets on with the business at hand without fuss and fanfare. People outside the sector often only think of insurance when there is a problem. The reality is that to be in a position to address those problems, a great deal of care and preparation is required long before the problem ever arises.

In the majority of cases, insurance operates in the background and with a great deal of foresight, and with the exception of blatantly obvious situations where insurance is required by law, such as in the case of motor insurance, the sector goes unnoticed by the public.

Take for example, the transportation of goods shipped all over the world. Manufacturers would not risk sending their products across oceans unless they can transfer that risk to an insurer. The same applies to small or large businesses. They are prepared to carry the risk of success or failure due to having the right stock, the right location, the right price and so on, but then they transfer the risk of failure due to perils beyond their control, such as a fire or flood as well as numerous others destroying their stock. This is where insurers step in and help complete the puzzle.

Society, in general, has become more discerning. This is a positive spinoff as society becomes more affluent and better educated and informed. Standards are raised and meeting customers’ expectations becomes more of a challenge, whether selling shoes, serving food or indeed selling insurance, the imaginary bar has been raised.

Pressure is constantly applied to ignore or bend policy wording, increase settlements and go that little further. And this is where the challenge for insurers lies.

A fundamental principle of insurance is that terms are agreed before a policy is incepted and documented in the form of a policy wording. If that policy wording is perceived as pliable after a claim, expectation management becomes very difficult and will most likely result in one of the parties’ disappointment. I am not advocating absolute rigidity in claims settlement, rather absolute certainty of what is and what is not covered in the event of a claim.

In terms of the softer issues surrounding customer service, these can and are being met but it must not be overlooked that most come at a cost. This cost is being absorbed by the insurer and not passed on to the insured. Clearly, this is finite and insurers must be sure that long-term plans are in place that enable the continued investment required to cope with challenges ahead as well as to strengthen or at the very least, to maintain capital in line with the onerous regulatory framework.

On the subject of regulatory framework, one cannot avoid mentioning the challenge that faces the sector as a result of a new wave of regulation. The much talked about Solvency II regulation has been on the way for the best part of 10 years so no operator can claim surprise as an excuse.

Solvency II presents a steep learning curve for both operator and regulator. The ultimate goal of the framework is to protect policyholders by ensuring that insurance undertakings (insurers) are well managed, well capitalised entities that have a close link and balance between their risk profile, capital and skills. Prudence is a key word that permeates throughout. Those insurers that are well managed and well capitalised will have to introduce changes to be in line with the framework. Others will have a good deal to do to get their house in order.

Pressure is constantly applied to ignore or ‘bend’ policy wording, increase settlements and go that little further

January 1 marked the start of the Interim Measures. In layman’s terms this is a trial run of the framework when insurers are working hard to ensure that everything is in place.

Meanwhile the regulator is ensuring it has everything in place to appropriately regulate the operators. One thing is certain: compliance comes at a cost. This is not a bad thing; on the contrary, it is good that the market is well regulated and insurers are stronger. However, as in any business, a cost needs to be taken into account and one hopes that the cost/benefit tips in the direction of the latter.

While speaking of costs, one cannot ignore the fact that over the last few years, due to competitive market forces, the cost of insurance (premiums) has not been increasing in line with inflation and in some cases they have actually been decreasing. This has been happening at a time when all insurers’ costs have been on the increase.

Operational costs, including items like staff salaries, water and electricity, cost of claims and repair costs, compliance costs and many others have seen a steady increase and it is safe to say that as a sector, these have not been reflected in the premium being charged. The writing is on the wall that this will need to be addressed in order to ensure that the ‘prudent insurer’ principle is maintained.

Any sector of an economy is a dynamic living organism that constantly evolves and adapts to what is going on around it. I am confident that insurers will adapt to the new realities.

Naturally, this will be at differing rates and priorities. In the meantime the insuring public should take a closer look at the undertaking they are entrusting to carry part of their risk.

Julian Mamo is managing director at GasanMamo.