Insurers and their clients count the cost of extreme weather

With large parts of the country lashed by heavy rains that have caused flooding and extensive property damage in the past few months, it is easy to see why the latest World Economic Forum Global Risks Perception Survey listed “extreme weather” as the second most severe risk on a worldwide scale over the next 10 years.

The South African Reserve Bank noted the flooding in KwaZulu-Natal in April 2022 had caused significant damage to infrastructure, with the provincial government estimating the cost of repairs to be in the region of R17 billion. The extreme weather was exacerbated by the failure of dam walls, which led to Toyota’s Prospecton plant being flooded, causing billions of rands in damage.

This year, although there has not been a singular event to match the disaster of the 2022 KZN floods, floods have caused widespread destruction across the country. Think Mpumalanga, the Eastern Cape, Gauteng, KZN, Limpopo, and the Northern Cape. And not to forget the damage caused to roads and property by extreme rainfall in towns spread throughout the Western Cape: Paarl, Wellington, Stellenbosch, Somerset West, Franschhoek, and Worcester.

Indeed, it has been a long winter, and it is not over yet. But how does the cost of flooding-related insurance claims submitted so far this year compare with the monetary losses incurred because of last year’s KZN floods?

Rudolf Britz, the chief actuary at Momentum Insure, says the floods in KZN in 2022 are believed to be a 1-in-20-year event.

“This means that such an event is not expected to happen frequently but has a probability of about 5% to occur in any given year. From our internal statistics, the aggregation of flood damage that happened in the first six months of 2023 is not as severe as the single event that occurred in KZN in 2022,” Britz says.

He adds that Momentum Insure is tracking an aggregation of flood damage that occurred in Gauteng in December 2022.

“This is expected, as it is the rainy season in the inland of South Africa. Other than that, the excessive rain in the Western Cape, the windstorm in KZN, and the earthquake in Gauteng that happened recently, combined, make up only 50% of the cost of the December catastrophe being tracked.”

Herman Schoeman, the chief executive of Guardrisk, said they too have not experienced claims levels (number of claims and severity of damage) similar to those experienced from the KZN 2022 floods.

“The recent KZN, Cape Town, and Mpumalanga floods have not resulted in significant claims for the Guardrisk general insurance business.”

But, as Schoeman explains, Guardrisk, as a provider of cell captive insurance and risk solutions, has limited exposure to personal lines business (private motor and household), so their commercial business is somewhat smaller than other more established commercial books.

“These events obviously had very little impact on our book of specialist business,” Schoeman says.

Extreme weather forecast

At the El Niño 2023 Summit held at the University of Pretoria on 21 June, South African climate experts called on governments, businesses, and communities to increase their awareness of the pending El Niño that is manifesting in the central Pacific Ocean.

Read: Impending climate phenomena could derail next year’s prospect of lower interest rates

According to Dr Neville Sweijd, senior researcher at the Council for Scientific and Industrial Research and director of ACESS, although the changes in weather and climate were continuous, the concern was whether, in the long term under the influence of global warming, this type of event would occur more frequently “as climate models suggest”.

Britz, while not denying the impact of climate change, says a critical item that should be discussed more widely is the maintenance of infrastructure that was designed and built to handle severe flooding.

“The lack of upkeep of stormwater drains, dam sluices, road infrastructure, and more adds considerably to the damage sustained when these events do happen.”

Britz says building regulations are being applied selectively and, recently, more loosely, “especially in some upmarket estates”.

“Also, building maintenance is not always done well, timeously, or to standard, and even more so under harsh economic conditions such as the ones we are experiencing at present. This means that the structures are not always built or maintained to be able to withstand the severity of these storms,” he says.

Impact on premiums

Predictions that these weather changes will be continuous and long term in nature have led to speculation that people living in and businesses operating in disaster-prone areas might be expected to pay more as insurance companies hike their premiums for climate change-related cover and claims.

Britz says the incidence of these storms will affect the rates being charged.

“This is also a continuous process where the immediate future (one to two years) is forecasted to determine the rate to charge. If one could distinguish risks where there was better adherence to building standards or maintenance from others, the rate being charged on these better risks would not be much affected.”

He adds that the level of increase depends on the level to which the individual risk’s characteristics could be determined by the insurer.

According to Schoeman, the overall market increase seems to be about 15% to 20% for policyholders who have had large claims and slightly lower across the entire book.

Premium increases, he says, are driven by several factors, including the impact of inflation on the cost of repairs, crime levels not normalising, and weather-related events.

“In addition, the entire market has experienced significant reinsurance increases due to a number of catastrophic events in South Africa over the past four years. These include Covid business interruption claims, the KZN floods, and the (2021) KZN and Gauteng riots, which didn’t impact insurers directly but had a significant impact on the reinsurance market through the South African Special Risk Insurance Association.”

Read: 97% of claims settled: Sasria pays out over R32bn in wake of 2021 riots

As to whether premium increases informed by continuous extreme weather incidents would be limited to policyholders located in disaster-prone areas only – or applied across the board ­– Britz says, as a principle, it makes sense to have the whole insured population contribute to catastrophes that cannot be avoided.

“And where the only contributable factor is climate change, this will probably be the best approach. However, since the increase in flood damage is in most cases due to a lack of infrastructure maintenance and individual adherence to building standards, the specific risks will have to carry the bulk of the cost,” he says.

Natural disaster cover

Sasria was formed in 1979 to provide insurance cover for special political risks, such as political riots and terrorism. As climate change threats increase, there have been calls from some corners for the short-term insurer to include natural disasters under its umbrella.

In Britz’s opinion, where the increase in risk is due to systemic events only (climate change or systemic lack of maintenance), this would be useful.

“However, one would not want to insure poor maintenance using a scheme like that, as it removes the much-needed responsibility of the individuals to ensure the assets are kept in good condition,” he adds.

Schoeman is not entirely sold on the Sasria idea either, but, he says, there is a need for some level of protection to cover consumers and businesses that cannot afford to buy any insurance or to insure their risks at the right levels.

He says the insurance industry has a responsibility to participate in finding solutions for natural catastrophes in co-operation with the government at national and local levels.

“These solutions may include Sasria. Internationally, there are successful examples of funds that have been created between industry and government to support victims of extreme weather events who otherwise cannot afford insurance in the general market,” he says.

The road ahead

On charting the way forward, Schoeman says the challenge for the industry is to remain sustainable in the long term and to be able to continue to offer insurance protection at affordable rates to clients given the constantly changing risk environment.

He says the reality is that this cannot be accomplished without also increasing premiums paid by policyholders. Fortunately, he adds, this is not the only mechanism available to insurers to ensure sustainability.

“The rapid increase in technology and the decreasing cost thereof also enables insurers to lower their cost base whilst maintaining cover and service levels. There is also a significant responsibility on policyholders to manage their risks and exposures to weather-related events as far as possible.”

He says the probability of an insurer going under because of a single catastrophic event should be minimal, adding that the insurance industry is well regulated and must keep minimum reserves and capital which can be utilised in times of catastrophic events, reducing the risk of failure.

Schoeman says regulations also require insurers to charge adequate premiums and buy appropriate and sufficient reinsurance cover for the risks that they underwrite.

“However, it is, critical for insurers to manage their exposures adequately and to engage in responsible underwriting practices to ensure the sustainable availability of reinsurance support in the future,” he says.