It’s the end of the world as we know it

The world that we are living in is inherent with risks. No longer do we only have to worry about man made challenges, but we now have to contend with natural catastrophes which are occurring on a more frequent basis.

According to reports by global reinsurer Swiss Re, total economic losses from natural catastrophes and man-made disasters will reached approximately $85 billion in 2015. Insured losses, however, were just $32 billion. Insured losses from natural catastrophes were lower than in 2014, while man-made losses were higher.

Crunching the numbers

The figure expected at the end of 2015 was down from $113 billion in 2014 as well as the previous 10-year loss average of $192 billion. Natural catastrophes caused $74 billion in losses and man-made disasters the remaining $11 billion.

Of the total economic losses, $32 billion were insured (vs. $35 billion the year before), with $23 billion triggered by natural disasters, down from $28 billion in 2014. This is also below the annual average of $55 billion for the previous 10 years of natural catastrophe insured losses.

This shows that there is a significant insurance gap when it comes to natural disasters. While some may think of insurers as a grudge purchase, it is when a significant event occurs that you see its true value. Think of Hurricanes Katrina and Sandy and the damage that was left in their wake.

A year of perils

The Swiss Re report points out that losses were caused by various severe natural catastrophes across different perils in 2015. These included windstorms, hurricanes, earthquakes, flooding and wildfires.

A February winter storm in the US was the largest loss-making natural disaster of the year, resulting in insured losses of more than $2 billion. Low activity during the North Atlantic hurricane season kept the total global insured loss low.

Large disasters occurred in many other parts of the world also, contributing to the total number of fatalities more than doubling from the previous year to around 26 000. In April, a magnitude 7.8 earthquake struck Nepal and neighbouring countries, triggering a humanitarian catastrophe. Around 9 000 people lost their lives and approximately 500 000 houses were destroyed. Economic losses are estimated to be more than $6 billion, of which only around $160 million are insured, owing to the country's low insurance penetration.

The slow killer

These disasters have an immediate impact when it comes to casualties and deaths. But there are other slower killers. South Africa is experiencing its worst drought in over a decade with farmers seeking relief far and wide in an attempt to produce some yield from their farms.

While we have recently been receiving some relief in terms of rain, it has come too late.

News website IOL reported in January that Farmers currently have their highest-ever debt with South African banks of more than R125 billion ($7.5 billion) at a time when a drought, caused by the lowest rainfall on record, is withering cornfields and discouraging the planting of crops.

Rainfall last year was the poorest since records began in 1904, the South African Weather Service said on Thursday. El Nino, a movement of warm water in the Pacific Ocean that typically leads to a rise in temperatures and a drop in rainfall for South Africa, has left farmers with what is expected to be the smallest corn crop since 1995. They will also probably sow the smallest area with the grain since 2011, according to the government.

The strain on farmers’ finances comes as South African banks, which have total lending exceeding R3.29 trillion, contend with increasingly indebted consumers. The strain on households has worsened because of accelerating inflation and rising interest rates, caused partly by the more than 40 percent slump in the rand against the dollar since the start of last year.

Summertime sadness

Before the worst of the drought had taken a hold on the South African farming industry, FAnews spoke with Gerhard Diedericks, Santam: Head of Agriculture, to discuss the impact that droughts have on the insurance industry.

He said that to give you an idea of how significantly catastrophic weather events can impact our business; we can compare the claims for 2014 and 2013. In 2014, Santam’s net catastrophe claims were R187 million, significantly lower than the R280 million claimed in 2013. This is because a number of catastrophic weather events in 2013 resulted in a loss-making of R142 million.

The turnaround in the claims environment in 2014 resulted in an underwriting profit of R251 million in that year. This aspect of our planning and underwriting is very much at the mercy of the weather.

He adds that the below average rainfall and drought of the past four seasons has resulted in unfavourable insurance results for multi-peril crop insurance and forced insurers to revisit their underwriting strategies to ensure the sustainability of the sector.

A few years ago, in response to changing weather, Santam restructured the core composition and ratio of its hail and multi-peril crop insurance to try and ensure sustainability for both farmers and Santam. This relates mainly to insurance products for grain crops, insurance against hail damage, and multi-peril crop insurance, which includes drought cover.

And this was before the claims from the 2015 drought have come in. One shudders to think what that final figure will be.

Interesting read

While the current drought is having an acute impact on the South African public and the economy, it is interesting to see that global insurer Allianz reports that South Africa is more concerned about other perils.

According to the Allianz Risk Barometer the top three leading risks for businesses in South Africa are cyber incidents (42%), business interruption (BI) at 32% and changes in legislation and regulation (26%).

Macroeconomic developments and market developments feature strongly as risks for businesses in the rest of Africa and Middle East while political risks (war, terrorism and upheaval) rank higher than any other region.

The area is the only one to rank power blackouts (5th in South Africa and 10th in the rest of Africa and Middle East) in the top 10. These risks are appearing for the first time for both South Africa and the rest of Africa and Middle East. Last year’s Africa and Middle East responses were included as part of the Europe, Middle East and Africa region.

Turning to cyber

Allianz reports that cyber incidents gained 11 percentage points year-on-year to move from fifth position (first in South Africa and fifth in rest of Africa and Middle East) into the top three risks for the first time on a global scale (28% of responses).

Attacks by hackers are becoming more target-oriented, lasting for longer and can trigger a continuous penetration. While cyber-attacks are increasing both in frequency and severity, companies should not underestimate the impact of an operational failure in today’s highly digital and connected industries. The report goes on to add that a simple technical failure or user error can result in a major IT system outage disrupting supply chains or production.

While a cyber-attack cannot be seen in the same light as a catastrophe event, how far-fetched is this notion? If we look at the South African Revenue Service and the amount of sensitive data that it holds, a large scale breach would have a significant impact on the public which could have catastrophic consequences. If you think back to the Sony hack in 2014 or the target hack in the same year, perhaps reinsurers should look at cyber-attacks as catastrophe events.