Rain, rain and more rain…

According to the latest Swiss RE sigma study, global insured losses from natural catastrophes and man-made disasters in 2013 came to $45 billion, which is down from $81 billion in 2012.

Of the 2013 insured losses, $37 billion were generated by natural catastrophes, with hail in Europe and floods in many regions being the main drivers.

Biggest humanitarian catastrophe in 2013

Asia was hardest hit by natural catastrophes in terms of economic losses and victims. Typhoon Haiyan, which hit the Philippines in November, brought strong winds, alongside heavy rains and storm surges. Around 7 500 people died or went missing, and more than 4 million people were left homeless.

The second biggest humanitarian disaster of 2013 was the June flooding in the state of Uttarakhand in India, which claimed some 6 000 lives.

Europe suffered heavy losses

Europe suffered its fair share of disaster events in 2013. Massive flooding in central and Eastern Europe in May and June came after four days of heavy rain causing large-scale damage across Germany, the Czech Republic, Hungary and Poland.

Total economic losses were $16.5 billion, and the insured loss was $4.1 billion.

Many regions around the world were hit by floods in 2013. The single largest loss-event in North America was extensive flooding in Calgary, Alberta and the surrounding area following six days of torrential rain in Canada. The economic loss was $4.7 billion and the insured loss was $1.9 billion. Floods also generated losses in Australia, Asia and South America.

Flood protection

In an effort to protect the country from suffering similar damages, and bearing in mind the devastation caused by Hurricane Katrina and Hurricane Sandy, US President Barrack Obama has passed a bill lowering flood insurance premiums in order to cover the greatest possible sector of the population.

A report by media giant CBS points out that that the bill cleared Congress in March 2014 and reverses most of the Biggert Waters Act of 2012 which overhauled the government’s much-criticized flood insurance program.

The report adds that the legislation will allow below-market insurance rates to be passed on to people buying homes in flood zones with taxpayer-subsidized policies.

Taking a local perspective

While South Africa does not experience the violent storms that are known to cause the devastating floods that are found in the US, climate change has had a significant impact on the local market in the past two years.

Significant rainfall in the Western Cape, Gauteng, North West and Limpopo has seen many home owners having to deal with the harsh realities of flooding. And meteorologists are expecting these types of weather patterns to happen on a more regular basis. With this in mind, we asked some local insurers if similar legislation would be practical in the South African market.

Changes in climate could potentially render a zone that was previously not flood prone to one that now is flood prone. John Melville, Executive Head of Risk Services at Santam, says that there is significant government involvement regarding this particular issue in South Africa. Against this, one must balance the risk of the government subsidy encouraging future development in flood zones, which is undesirable; so this must be accompanied by very tight controls around new developments in such areas.

“Government often drives this because they have to pick up the relief aid in any event for those who are not adequately insured or uninsured. There can be value in government partnering with the insurance industry in this because in this way government can leverage from the general insurance industry’s claims, risk and underwriting management processes. In South Africa we must be particularly vigilant about avoiding future development in flood zones, and creating unintended incentives to do so,” says Melville.

Sean Jackson, Head of Auto & General Brokers, agrees with this pointing out the danger to the industry if this process is not followed.

“The fact of the matter is that if an underwriter does not receive the correct premium, the entire insurance pool is placed at risk. This is not only to the detriment of the insured, but also to the industry and its employees. The article under discussion alludes to the fact that even in the US, concerns are being raised that the impact of the Bill was not correctly assessed and political pressure may have caused some hasty decision making on this matter,” says Jackson.

Becoming a trend setter

Because of the size and nature of the South African financial services industry, it is often seen as a trend setter on the African continent. If meteorologist's predictions are proven correct, this could be a trend across the whole continent, and South Africa could have a future role to play in designing market leading flood insurance products.

“South Africa could definitely be a world leader in designing such legislation. However, for this to work, government will need to play a very active role and subsidise premiums,” says Jackson.

Perhaps a perfect platform to achieve this would be South Africa’s involvement in the Southern African Development Community as well as its role within the African Union. This can only be achieved after active engagement between government and the insurance industry.