Bringing down the house
South Africa has had its fair share of natural catastrophes over the past two years. The hail storms, which took place at the end of 2012 and 2013, have shown the local insurance industry that it needs to build significant capacity in order to prepare itself for this being a more frequent occurrence.
Towards the middle of August, a 5.3 magnitude earthquake occurred just outside Orkney in the North West. A few weeks later, a 4.6 magnitude earthquake occurred just outside the informal settlement of Orange Farm in Gauteng.
Combined efforts
While earthquakes are a unique occurrence in South Africa, the insurance industry treats all natural catastrophes with the same level of care and skills. Therefore, there should be no concerns over the industry’s preparedness for major earthquake claims.
“South Africa has proven that in times of large disasters, the country is well equipped to deal with subsequent damage. The flooding in Limpopo at the beginning of this year, for example, showed that with the combined efforts of business and government, the response rate to these types of natural disasters is quick and impactful,” says Discovery Insure Chief Executive Officer (CEO) Anton Ossip.
He adds that insurers will purchase a reinsurance programme to guarantee that they are protected from large catastrophic events. The measure typically used is a one in two hundred year event, for example, which will include the probability of having an earthquake. In addition, the insurer will be required by legislation to hold a minimum amount of capital within the business to meet adverse experiences or catastrophic events.
Preparation is a non-negotiable
Because earthquakes in South Africa are a one in two hundred year event, there are fears that South Africans would be typically underinsured when it comes to earthquake cover. This is a concern when one considers the level of damage an earthquake can potentially cause.
“The belief that South Africa is underinsured is probably driven by a wider issue concerning the purchase of insurance products in general. Just as we have a large number of cars on South Africa’s roads that are not insured, there will also be a great number of dwellings that are not insured against any Fire and Allied perils offered by standard property insurance products,” says Hans Schollenberger, Executive Head of Underwriting and Risk at Emerald for Santam Specialist Business.
He adds that there is probably a need to provide products which enable greater insurance penetration, specifically for first time home owners and the lower income group.
A cash strapped industry?
The severity and frequency of the two severe hail storms which took place in 2012 and 2013 has put the industry on the back foot and has significantly increased the recovery time needed for the industry to find its feet. What would happen if a worst case scenario had to occur and a significant earthquake had to hit the industry while it is still trying to recover from the hail storms?
"If insurers have adequate reserves, the impact would be felt mainly in the financial year of the insurer in which the earthquake occurs, otherwise it may be felt over a longer period of time as reserves need to be strengthened. For property insurance in the corporate market, an indemnity period of 12 or 18 months would be typical," says Schollenberger.
Taking a lead from a prepared market
Ossip also provides a relevant example from a terrifying earthquake which happened in Japan. He points out that on the 11th of March 2011 an undersea earthquake and resultant tsunami caused damage to over 1.1 million buildings in Japan, of which over 127 000 were totally destroyed.
It also left over 4.4 million households without electricity and over 1.5 million households without water. Such an event leaves millions of tonnes of debris which needs to be cleared before rebuilding efforts can commence.
While this is a fairly new challenge for local insurers, it is a challenge that needs to be addressed if it is going to be a recurring problem.
