Bad news for insurance claims in South Africa

Fire, faulty workmanship, and natural catastrophes are the top causes of insurance claims for business in South Africa, says global insurance company Allianz.

“Insurance claims from companies have become more severe over the past five years due to factors such as higher property and asset values, more complex supply chains and the growing concentration of exposures in one location, such as in natural catastrophe-prone areas,” said Allianz Global Corporate & Specialty chief claims officer Thomas Sepp.

Sepp added that the future is ‘not looking any brighter’ anytime soon, with the cost of insurance likely to increase as a result.

“Companies and their insurers have shown resilience to weather the loss impact of the pandemic, but the ongoing war in Ukraine, a spike in the cost and frequency of business interruption losses and the sustained elevated level of cyber claims are creating new challenges.

“At the same time, the top two causes of claims – fires and natural hazards – remain significant loss drivers for companies. Last but not least, the impact of soaring inflation around the world will bring further pressure on claims costs,” he said.

Top causes of loss in South Africa

Fires generate the most expensive losses for South African businesses accounting for more than 60% of the value of all claims over the past five years.

Faulty workmanship incidents are another major cause of loss (20%), while natural catastrophes rank third, with storm losses the most frequent driver of these claims. Hailstorm events, while uncommon, can be costly when they do occur if one happens in a metropolitan area.

Water damage generates the highest number of corporate insurance claims in South Africa (30%+), although one in five claims also result from crime/wilful acts.

“South Africa experienced three major claims events in the past three years. Covid-19 business interruption following the nationwide hard lockdown as well as civil unrest and flooding. It’s no surprise to see fire, natural catastrophe, storm and water damage accounting for the majority of the value of all claims in the country.

“Faulty workmanship incidents are another major cause of loss. As a corporate insurer, AGCS plays a vital role in ensuring any disruption following a loss event is minimized,” said Lulu Pule AGCS Head of Claims in South Africa.

Inflation puts the undervaluation of assets in the spotlight

Ultimately, inflation brings pressure on claims costs from multiple angles.

Property and construction insurance claims, in particular, are exposed to higher inflation, as rebuilds and repairs are linked to the cost of materials and labour, while shortages and longer delivery times inflate business interruption (BI) values, Allianz said.

Other lines of insurance, such as directors and officers, professional indemnity and general liability, are also susceptible to inflationary pressures through rising legal defense costs and higher settlements.

“Replacement costs more, and replacement takes longer, which means both the property damage and the business interruption loss are likely to be significantly higher,” said Sepp.

“Updating insured values for all new contracts is, therefore, a pressing concern for insurers, brokers and insureds. If this doesn’t happen, our clients run the risk of not being fully reimbursed in the event of a loss, while insurers run the risk of underpricing exposures.”

The insurance market has already seen a number of claims where there has been a significant gap between the insured’s declared value and the actual replacement value, he said.

“For example, in a claim for a commercial property destroyed in the 2021 Colorado wildfires, the rebuild value was almost twice the declared value, due to a combination of inflation, demand surge, and underinsurance.”

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