Insurance crisis on the cards for South Africa

 ·30 Apr 2024

Weather-related insurance claims are rising in South Africa, and global warming will likely worsen the situation.

According to Ronald Richman, chief actuary at Old Mutual Insure, weather-related events threaten an insurance crisis, with insurers in South Africa bracing for the possible impact.

“While the country used to be a Catastrophic Event (CAT) free zone, the scale and magnitude at which disasters have taken place recently means we are now experiencing a dramatic shift in the CAT landscape,” said Richman.

In 2023, Old Mutual Insure recorded ten weather-related claim events.

Three were significant – the Western Cape storms in June and September and the hailstorm in Gauteng and Mpumalanga in November 2023.

The phenomenon is not unique to South Africa, with Richman stating severe convective storms were primarily responsible for CAT losses, accounting for 68% of global insured natural catastrophe losses in the first half of last year.

2023 was also the hottest year on record due to climate change and El Nino, with the latter generally causing drier conditions every two to seven years.

Some experts say the US economy is overexposed to climate risks in a similar way that it was overexposed to mortgage risks in 2008, which were a primary cause of the global financial crisis.

“Given this picture, it is not far-fetched to believe that climate change has the potential to destabilise the global insurance industry, with ripple effects for South Africa,” said Richman.

Stress is already emerging in the US, with companies withdrawing coverage from California and Florida.

“While many of the recent events have not been unprecedented, insurers have experienced them as particularly acute losses hitting their bottom lines and capital reserves.”

“This is due to reinsurers taking significantly less risk from these types of events, leaving insurers unable to smooth out the losses over time.”

According to research from PwC and Moody’s, reinsurers see climate change as the most significant risk facing the sector, with many reinsurers taking a hit as they accumulate losses from customer-facing insurance companies.

In response, many are increasing prices, limiting coverage and exiting some markets to improve returns.

“This structural shift in the reinsurance market has far-reaching implications, demanding a fundamental re-evaluation of how the market approaches risk and pricing,” said Richman,

Importantly, as opposed to popular belief, profit margins in the traditional lines of business in the non-life insurance industry are slim.

“This, together with the convergence of inflationary pressures and losses from CAT events, means that we are in a pressure pot, ready to bubble over.”

To ensure that insurance is sustainable, he said that the right price must be charged to cover the risk of climate change.

“Otherwise, you jeopardise the trust placed in the insurance system to be there when things fall apart.”

“To fund the level of coverage policyholders have previously enjoyed price increases will be necessary over time to account for these losses and needs to be done in a manner that reflects the true risk posed by each policy.”

What to do

He said that it was not all bad news, as new modelling techniques are being exported to better quantify the rising climate change risks, which should help in navigating turbulent waters.

“Mitigation efforts are essential. Education is key, as consumers must understand the importance of risk management and asset protection against climate change,” he added.

“In addition, public-private partnerships can help address underinsurance in the SA market and spread risk more equitably. Currently, there isn’t a structure for this type of solution, unlike in other parts of the world where it has been introduced successfully.”

He used the Flood Re in the UK as an example, which is a flood reinsurance scheme in the UK, a joint initiative between the government and insurers to make flood cover more affordable.

“In South Africa, where structural deficiencies exacerbate the disparity between the insured and the uninsured, a similar approach is warranted.”

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