An expensive lesson in underwriting residential fire risk
Insurers and reinsurers were still tallying up the losses caused by flooding in the Eastern Cape and hailstorms in Gauteng when another catastrophe struck. On Sunday, 11 November 2012, a fire tore through St Francis Bay in the Eastern Cape, destroying or
“This is certainly the biggest fire event affecting multiple homes in the middle to upper income groups that I can recall,” says Charl Swarts, Head of Commercial and Industrial Insurance at Etana. “Although the tornadoes that swept through the Cape Flats (in 1999) and Matlosana (in 2007) affected more houses they resulted in relatively minor damage when compared with the total loss of virtually all affected structures in this instance”. He says that the 2011 Somerset West fire which resulted in several houses and a hotel being lost were the next closest ‘residential’ fire catastrophe on record. (The industry has paid out numerous high-value commercial losses involving multiple structures in the past).
Counting the losses
Is it possible for claims on 76 structures (plus contents) in the Eastern Cape to total up to R600 million? Insurer Etana does not expect the total losses to reach the numbers bandied about by the media on Monday and suggest the total aggregate loss should not be more than R300 million. Until a clear picture emerges we will have to consider the early estimates from a number of insurers with exposure to the region.
Among the first to divulge their exposure was Alexander Forbes Insurance which said they had received around R30 million in claims by Tuesday. The group expects its total exposure to be around R45 million. “We insure about 100 homes in the area and claims have been reported on 14 of them,” says Gari Dombo, MD Alexander Forbes Insurance. “Some were insured for both buildings and contents and others contents only”. He observed that additional costs associated with alternative accommodation or loss of rent could push up a the ‘loss’ claims by up to 25 % depending on how long it takes to rebuild.
Thatch Risk Acceptances (TRA) – a specialist thatch underwriter writing on behalf of Compass Insurance Company Limited – estimated its claims from the St Francis fires to be in the region of R100 million. “By close of business on Tuesday we had 20 individual homes gutted as well as eight units in Sandpiper Body Corporate,” notes Natasja Blok, Managing Director of TRA. “We hope to have received all the claims where our clients were affected by the end of this week”. Blok believes that total losses to the industry could easily reach R500 million. “The average St Francis home plus contents is valued at far more than one might anticipate, these are luxury holiday homes,” she says. Sums insured on TRA’s books are between R1 million and R16 million per household.
Mutual & Federal estimates its exposure to St Francis Bay claims to be worth more than R20 million. “Depending on whether more customers contact us, we might see an escalation of claims in the coming days”, says Heidi Dias, Head of Claims at Mutual & Federal. “Our Port Elizabeth management team travelled to St Francis Bay to assess the level of the damage and to assist our clients”. The group has exposure through 10 units in the Royal Wharf complex as well as two free standing homes.
Where to from here?
What happens to St Francis residents and holidaymakers in the aftermath of the fire? Etana says that the forensic investigations will focus on what started the original fire. This ‘cause’ will apply to all subsequent fire losses, assuming the relevant policy conditions are met. But reinstating homeowners to their pre-tragedy position will be complicated. “Builders holidays are upon us and demolition of the extensive overall site may need to be carried out,” notes Swarts. “It is entirely possible that even with additional resources being sent to the area, rebuilding might only start in six to nine months in some cases”.
TRA notes that they would opt for settling their clients in cash as soon as possible. “We would definitely look at the forensic reports to establish if there would be any way of recovering some costs,” says Blok. “Regardless of our findings the rebuilding will be subject to engineers giving the go-ahead on walls and foundations as well as the availability of contractors and materials”.
Sensible underwriting of fire risks
The density of thatch structures in St Francis is quite unique locally. Early indicators are that the combination of strong winds, thatch roof construction and dwelling density contributed to the St Francis fire spreading rapidly from one building to the next. “If the roofs were of standard tile or IBR material the fire would have been contained to the house where the fire originated,” says Swarts. “This is due to the lower fire load and far lower fire inception risk associated with these materials”.
This fire could well force insurers to rethink their approach to insuring thatch risks, specifically with regards to fire prevention. Swarts says the installation of drencher systems that will prevent a fire starting on a roof adjacent to a fire, or extinguish a fire still in its early stages, are one possible preventative measure. Drencher systems are relatively cheap to install considering the cost of the houses they protect. Fire blanket barriers can protect contents and structure too, by isolating the blaze to the upper thatch layers. “One of the key issues if such circumstances are repeated is to have a proper fire fighting strategy aimed at containment of the blaze, sacrificing a few houses in the interests of the many,” he concludes.
Upward pressure on premiums
TRA expects the multitude of natural and man-made catastrophes over the past year to have an impact on the industry going forward. “The local insurance industry will have to start increasing rates,” says Blok. “Undercutting through the soft insurance cycle has driven rates to below sustainable levels, and once you factor in the losses incurred over the past year rates will have to start increasing to ensure a sustainable industry”. Alexander Forbes agrees that reinsurers will have to act. “Next year the reinsurers may put up their premiums on certain books, though we do not expect the increases to be prohibitive,” says Dombo.
Whatever the case, insurers will need to consider fire spread and exposure accumulation far more carefully when circumstances similar to St Francis prevail. “The reinsurers will be affected as will companies’ net accounts, though this event alone is unlikely to have much effect on general rates,” says Swarts. “The main effect of this will likely be in underwriters attitude to thatch risks and the rating and underwriting thereof”. He suggests that owners and local authorities consider the wisdom of replacing like with like following this catastrophe.
Editor’s thoughts: With floods, fires and massive hailstorms – plus widespread strikes in the mining and agriculture sectors – it appears that insurers, reinsurers and even peril insurer SASRIA will have a 2012 to forget. The good news for South African consumers is that their insurers have not folded under the pressure of spiralling claims, proving once again that the industry is resilient and well run. Is it easier to ‘sell’ short-term insurance during times of catastrophe? Please add your comment below, or send it to [email protected]
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