Loadshedding was singled out as a major risk across customer segments and insurance classes in this year’s Santam’s 2023 Insurance Barometer.
Released last week, the third edition of the biennial report offers insights into the evolving risk trends impacting South Africa. It surveyed more than 900 consumers, businesses, and brokers from across the country. The findings were combined with Santam’s own claims data.
For the first time since the report’s initiation, loadshedding and power surge (41%) replaced traditional risks such as fire, and motor vehicle theft and accident as the top concern among businesses, with theft (27%) second, and loss of profits (20%) third.
Consumers listed the economy (58%), loadshedding and power surges (57%), and accidental loss or damage of assets (39%) as the top three risks facing households, while brokers assisting consumers with personal lines insurance ranked loadshedding as the top threat (71%), economic challenges second (62%), and crime-related risks due to burglary, hijacking, and theft third (43%).
These findings hardly come as a surprise considering the losses consumers and businesses incurred these past two years because of Eskom’s ongoing electricity supply “squeeze”. The agricultural sector alone is estimated to have lost R23 billion in revenue during 2022 because of crop failure and decreased productivity resulting from loadshedding.
Accordingly, the report revealed an “exponential jump” in the volume and value of power surge-related claims across personal (consumer) and commercial (business) lines of business for two consecutive years, in 2021 and 2022.
In the report, Philippa Wild, chief underwriting officer: Broker Solutions at Santam, shared that the combined claims volume was up by 39% in 2022 (37% in 2021), and the value of claims paid across both lines soared to 48% in 2022 (after an astonishing 53% in 2021).
“The significant spike in these claims can be attributed to the on-and-off ‘switching’ that goes hand-in-hand with Eskom’s loadshedding programme; in turn, a response to inadequate energy infrastructure,” Wild said.
According to Thabo Twalo, head of Commercial Lines Underwriting at Santam, the short-term insurer’s claims data reflects a correlation between power surge-related claims and loadshedding.
“The Council for Scientific and Industrial Research reported loadshedding hours up from 1 169 in 2021 to 3 773 in 2022, an increase of 222%.”
‘Unsustainable’ surge in claims
According to the report, Santam experienced an “unsustainable” 45% increase in the volume of power surge claims in 2022 (48% in 2021) and a 49% spike in the value of claims paid in the commercial lines category (excluding specialist lines) in 2022 after a 62% spike in 2021, and first-quarter 2023 claims were significantly up from those in the same quarter in 2022.
“The increase in power surge claims in 2022 has eroded both capital reserves and underwriting margins normally set aside for fire claims,” Twalo said.
In the personal lines category, Santam experienced a 37% increase in the volume of surge claims in 2022, exceeding the 33% increase in 2021.
The report found that the value of power surge-related claims paid in 2022 nearly doubled for the second year running, catapulting by 47% (46% in 2021).
To remedy the “out-of-control claims”, Santam increased excesses and power surge pricing. Corrective actions taken by the insurer include a combination of cover exclusions, higher excesses, and a “repair rather than replace” policy for certain claim types.
Atang Matebesi, chief executive: Client Solutions at Santam, said the situation stabilised “somewhat” over the first half of 2023 and was expected to stabilise further after the application of stricter underwriting measures.
“There has also been an element of fraud in this claim category, as evidenced by insureds’ claims behaviour. Santam responded with measures to segment clients based on specific parameters and no longer offers power surge cover for certain profiles,” Matebesi said.
Mitigations and workarounds
Additional improvements in the power surge claims experienced in the second quarter of 2023 were attributed to households installing surge protection devices.
Consumer survey respondents said they installed UPS devices (34%), inverters (34%), generators (24%), solar panels (20%), and portable batteries (15%).
Attie Blaauw, chief underwriting officer: Client Solutions at Santam, said although installing these devices was positive in mitigating damages to household appliances, personal lines insureds must bear in mind that they add to the building and/or contents sum insured, and can also change your risk profile.
“Home solar installations can add significantly to the building sum insured (with the potential to add to underinsurance) but has not as yet factored in any change in risk profiling that a solar installation may necessitate. For now, Santam is watching its personal lines fire and theft claims to determine whether any premium adjustments will be necessary,” Blaauw said.
The report states that risk experts are also concerned that the weight of solar panels may compromise building infrastructure. Then there is also the additional risk attached to the storage and transportation of diesel and gas for alternative energy generation. The potential for theft of solar panels is also high on the risk “watch list”.
“Insureds must, however, take note of the general conditions of their personal lines insurance policy and meet the requirement for maintenance of these installations, as well as any regulatory requirements. A certificate of compliance is required to insure a solar installation,” Blaauw said.
Read: Some insights on insuring solar panels against theft
Potential grid failure
The main challenges faced by consumers and business due to loadshedding and power surges, the report found, included loss of productivity (43%), increased costs of doing business (34%), and economic loss (23%), with actual damage to assets at just 14%.
Twalo said the systemic nature of the risk made it difficult for insurers to offer cover in these areas.
“The business interruption (BI) type losses that would accompany a black swan event such as a national electricity grid failure cannot be absorbed, even by an international reinsurance system,” he said.
According to Twalo, the 2.2 times increase in loadshedding hours domestically prompted global reinsurers to take action to minimise their potential exposures following a worst-case scenario of a national electricity grid failure.
“This focus should not have surprised the market; reinsurers have been keeping systemic risk firmly in their crosshairs following the industry’s experience with contingent BI claims through the pandemic. They responded by introducing national grid failure exclusions on reinsurance treaties, which local insurers were obliged to follow.”
Santam implemented a grid failure exclusion from 1 June 2023. The insurer amended its electricity grid failure policy wording to refer to the interruption “… of any electricity supply affecting the whole of or any area larger than the municipality (be it local, district or metropolitan) within which any premises of the insured is located”. It also clearly defined “municipality” to mean metropolitan, district, and local municipalities, as defined by the Municipal Structures Act.
Wild said energy experts are in broad consensus that this type of total grid failure is unlikely.
“A smaller regional-level grid failure is, however, believed to be a more likely scenario. Nevertheless, insurance is not designed to respond to a loss event that would impact all policyholders in a large geographic area simultaneously,” she said.
