Safire has evolved from specialist timber insurer to offering a diversified range of insurance products, providing protection to clients in an increasingly volatile world …

Pierre Bekker, CEO of Pietermaritzburg-based Safire Insurance, discusses the dynamics of the current insurance market, and acknowledges the solid foundation created through their timber insurance business.

“Global insurance has been very difficult for the past few years, both in terms of claims expenses from natural catastrophes and the supply side of the business,” says Pierre. “There have been dramatic and costly events such as vast fires in Chile (2023), Greece and Siberia (2021), where 18 million hectares of forests were burned, and the Australian wildfires in 2020 and 2022, where 12.6 million hectares of both natural and commercial forests were destroyed, as well as the Californian wildfires of 2020-2021. There have also been severe wind storms in Europe. In addition, flooding and earthquakes have caused widespread devastation around the world.”

According to a United Nations Environment Programme report from 2022 entitled Spreading Like Wildfire, “climate change and land-use change are making wildfires worse”, with a warning to anticipate “a global increase of extreme fires even in areas previously unaffected”.

Violent wind storms are amongst the most damaging natural hazards in Europe, with annual loses reaching approximately € 5 billion in the EU and UK, with the highest absolute losses experienced in Germany (€ 850 million/year), France (€ 680 million/year), Italy (€ 540 million/year) and the UK (€ 530 million/year).

“Premiums collected by any insurer will never be sufficient to cover policyholders’ claims in a year of severe natural disasters, so insurers have to hold capital to meet the obligation to pay policyholders for possible claims that may or may not materialise. This capital comes at a cost and when interest rates increase this cost of capital increases,” explains Pierre. This is what Pierre refers to as the supply side of the insurance industry. Simply put, it is the amount of insurance capacity available and both the amount and cost of such capacity is inextricably linked to global financial markets.

“After COVID, there was an almost unprecedented reduction in interest rates and capital flowed into the insurance markets,” he says. “This resulted in significant increases in the insurance capacity available which further softened the insurance cycle, leading to unsustainably low premiums. Just as the term ‘zombie firm’ refers to a company that doesn’t earn enough to cover its interest costs yet continues to operate, so the market has seen a rise in so-called zombie insurance capacity during the era of easy money. This refers to insurers extending their capacity to writing business at technically unprofitable levels and for classes that they do not normally participate in.”

However, the days of easy money are over and the sudden rise in interest rates is now reversing this trend in no small measure. “The supply side constraints would on their own have a hardening effect on insurance markets, pushing rates up in conjunction with the increasing cost of capital,” says Pierre. “But combine this with the devastating natural catastrophes of the past few years, which have resulted in massive claims costs for insurers, and we have a perfect storm playing out in the global insurance markets. Predictions are now pointing to a severe hardening in the markets, the likes of which have not been seen since 1992.”

Safire came about because of the high cost of timber insurance in South Africa in the 1980s, a situation created by the cost to global insurers of devastating fires in South America and elsewhere in the world. Timber grower Bailey Bekker, Pierre’s father, conceived the concept of a timber insurance co-operative, with individual timber growers contributing to a pool of resources shared by other low-risk timber growers.

A special feature of commercial forestry is that, compared to other crops, plantations have a significantly extended growth period, depending on the tree species, geography and timber product in question. Accordingly, the related capital is bound and the trees are exposed to various risks for an extended period of time. However, despite their long risk exposure periods, only a small percentage of the world’s forests are currently insured.

“It is impossible for an individual timber grower to completely self-insure effectively”, says Pierre. “Forestry risk is considered to be low frequency and high catastrophe in nature. Because of this, the pooling effect of insurance is vital. Many timber growers that pool their premiums together pay for the very large, severe losses of the few. This is exactly why Safire was founded and continues to serve this purpose to this day.”

Although insurance markets are facing the ‘perfect storm’ on both the supply and claims expense fronts, Pierre explains that Safire offers protection against this market volatility for the following reasons:

1. Relationship with reinsurers
   Our reinsurers have long agreed to treat our forestry pool of risk outside of the major volatility in the open markets. This has come about because of a reciprocal loyalty we have to each other that transcends hard and soft market cycles. This loyalty could only have been offered to our reinsurers on behalf of our insured members because of the loyalty of our members to supporting the pool during good and bad times.
2. Performance of the pool
   The loss performance of our pool has consistently out-performed the market and we have shown really good results for our reinsurers over an extended period of 35 years, since Safire was started in 1987. This is in no small part due to a very selective underwriting approach where only well-managed risks are allowed access to the pool.

Pierre continues, “We are not completely immune to market forces but we have serious protection against extreme volatility, which in recent years has led to no insurance capacity for some commercial timber growers in our local market.”

Insurance is based on the number and frequency of natural disasters with actual and anticipated events being considered as per actuarial science models. ”Interestingly enough, our data shows that, locally, fires are not getting worse,” says Pierre. “Plantation fires in South Africa have not necessarily been more severe or brought about higher losses since the devastating fires of 2007 and 2008 that severely affected industrial forestry plantations.”

Weather models are now predicting South Africa to be moving from a typically wet (and unusually extended) three-year La Niña cycle into a dry El Niño period with the possibility of dry weather conditions bringing about low volatility in terms of natural disasters but potentially increasing the risk of fire.

Since its beginnings as a local timber insurer supported by the prestigious Lloyds of London, Safire has expanded to provide a diverse range of short-term insurance products. The company has seen an impressive 20% growth for the past few years, and while forestry only accounts for some 10% of the business these days, growth and diversification has enabled Safire to provide even better timber insurance services on a much more sustainable basis, in addition to its wider short-term insurance offering. But Safire’s timber clients are still close to Pierre’s heart. “It’s where our roots are, and for many years we were the only true suppliers of timber insurance to the local timber growers. It’s a partnership that we value…”