Climate change forum highlights the importance of the insurance industry
The issue of climate change is fast becoming an issue which is receiving increased attention around the world. While significant time and dedication is given to international political conflicts, one wonders how long it will take policy makers to make a strong case to elevate the issue of climate change to a similar level.
We always see the human side of the tragedies that are associated with weather related catastrophes. But does one take into account the significant pressure these events put on the insurance industry? This was the motivation behind the urgent forum on climate change which was held by the South African Insurance Association (SAIA) and the Insurance Institute of South Africa (IISA).
Fortifying the industry against possible losses
One of the US' most famous presidents, Benjamin Franklin, famously said that if you fail to plan, you are planning to fail. But it is difficult to fortify the industry against possible future losses when they are largely based on assumptions.
Here are the facts; due to increased extreme weather events, which have caused significant damage to motor vehicles and properties, the South African insurance industry had to pay out more than R1 billion in 2013. This was significantly higher than the claims paid out in 2012, which was also a bad year for the industry.
The key question that is foremost on the minds of the industry is if this will be a regular occurrence or if it is a freak phenomenon which is currently going through an extraordinary cycle.
Speaking at the forum was a high level representative, Dr Deon Terblanche from the World Meteorological Organisation, which is a specialised agency of the United Nations. Terblanche said that urbanisation and changing weather patterns are making extreme storm activity a more common occurrence.
"A growing and urbanising global population, and a warming climate, imply greater exposure to extreme weather events, including hail storms. There is a urgent need for improved techniques to observe and predict these events and for the financial tools to build resilience,” says Terblanche.
Professor Stuart Piketh from the North West University pointed to the fact that global warming is also adding between one and three extra warm days a year to South Africa's summer. This means that these are extra days where an extreme storm can occur.
Taking an insurance view
There is no doubt that climate change is having a significant impact on society. The insurance industry needs to be proactive in combatting these effects. The industry also needs to develop and implement risk mitigation strategies which would safeguard the industry against the possible fallout of what could be another bad year for the industry.
Waldi Els, Regional Claims Manager for Santam Group, also spoke at the forum about the challenge from an insurance perspective. "Our challenge is to encourage a culture of risk mitigation and risk awareness. We have to ensure that we, from an industry point of view, are prepared to deal with the challenges presented by such an event,” he said.
The sheer volume of claims makes it impossible for the insurance industry to handle by itself. A large portion of claims is handed onto the reinsurance industry which also had to take a significant knock in 2012 and 2013.
Also present at the forum was AON Benfield Catastrophe Analyst, Pieter Visser, who pointed out that the 2013 hail storms was a record for the reinsurance industry. "The hail event on 28 November 2013 caused the largest market catastrophe loss in the history of the local insurance industry and is estimated to be R1.4 billion. The impact of the rapidly expanding urban sprawl in Gauteng, combined with the increased participation of the emerging middle class in insurance, are the main drivers in changing the hail loss environment,” says Visser.
Cultivating a protective climate
The effects of the increasing threats of re-occurring thunderstorm activity are not limited to the motor or homeowner sectors. South Africa has a very active agricultural industry and is a key supplier of crops, not only to the local economy, but to various economies throughout Southern Africa.
Holger Schwarz, who is part of the Agricultural Insurance Team at Munich RE, points out that studies show a significant trend towards more humidity being seen in North America, parts of Europe and in the eastern portion of South Africa.
"Because of this, the severe losses, which occurred in these regions in 2013, are not surprising. South African farmers are more exposed than ever to hail and other natural perils. Therefore, they need comprehensive insurance cover as a risk management tool. This could be based on a public-private partnership (PPP) programme between the public sector, farmers and the insurance industry,” says Schwarz.
What is the way forward?
Climate change is a reality and every industry role player needs to play their part in resolving this growing issue. The exact approach that will be taken, going forward, remains to be seen. The PPP that was suggested by Schwarz is probably the best approach that can be taken at this stage. South Africa does have ‘state of the art' research facilities where predictive weather patterns can be shared with the industry. This is however limited to universities at this stage. As soon as these results can be used more widely, for example in collaboration with the South African Weather Service, it can play a major role in the identifying patterns and assist the insurance industry to be more pro-active.
Once insurance companies have relevant information about storm activity, and pre-emptive warning messages are sent to clients, Els points out that clients are heeding the warnings and moving their vehicles under cover. This is all part of the efforts to reduce the impact of climate change on insurer's books.
Editor's Thoughts:
It is good that the industry is becoming more aware than ever of the effects of climate change and the effects it is having on the industry. Perhaps the next step is to highlight this to clients and to have the necessary conversations with them about the realities of climate change. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
