Ignore climate change at your peril
In April 2019, KwaZulu-Natal (KZN) experienced heavy rainstorms and devastating floods which caused significant damage to property and killed 51 people. This came a month after Hurricane Idai killed thousands of people in Mozambique and left a trail of destruction that even contributed to load shedding in South Africa.
2019 has already been a challenging year for insurers when it comes to losses caused by weather related events, and with the wet season approaching at the end of the year, the possibility of more weather-related claims always exists.
In an exclusive interview with FAnews, Pieter Visser, a Catastrophe Analyst at AON South Africa, said that while the damage caused by the KZN Floods was devastating, it would not have a long-term impact on the insurance industry.
What have been the total losses related to the KZN floods?
Despite the tragic loss of life and the extensive coverage of collapsing properties, insured losses from the events related to the KZN Floods resulted in estimated insured losses of less than R1.5 billion.
This event by itself is consequently not expected to impact risk perception within the local insurance market and will not lead to hardening catastrophe cover rates. The uninsured losses are substantial and once again emphasizes on the need to make the insurance net wider to include vulnerable communities.
How has weather related events, affected the insurance industry over the past two years?
After large weather-related claims in 2017 (from the Knysna fires and floods in Durban), 2018 was one of the most benign years for weather related losses. Both events in 2017 surpassed R2 billion in insured losses; nothing close to that was experienced in 2018.
From an insurance perspective, the KZN Floods was not out of the ordinary and should not result in a price response from reinsurers.
From an insurance perspective, how can we share expertise with other African countries when it comes to dealing with weather-related events?
Although South Africa has experienced large events, we have not been exposed to the kind of destruction witnessed in Mozambique during Hurricane Idai.
The probability of a direct cyclone eye crossing Beira of that intensity is regarded not very likely. Insurers often do not contemplate these large events when looking at protection. However, very unlikely events do occasionally happen.
Increasing catastrophe cover to required limits is not that expensive compared to the risk of having no cover. Insurers must understand their risk accumulations well as well as their capacity to deal with potentially extreme scenario’s. Solvency Assessment and Management (SAM) capital requirements have gone a long way to ensure more effective catastrophe cover by insurers in South Africa. Similar guidance by regulators in African countries will facilitate that all insurers are properly protected against perceived rare extreme events.
Deep impact
While the damage left behind by the KZN Floods was devastating, the biggest loss from the event, from an insurance perspective, were the uninsured losses related to the event.
In a press release, Mandy Barrett Business Unit Head: Marketing and Volume Sales at Aon South Africa pointed out that South African property owners are by and large not taking the risks posed by weather catastrophes as seriously as they should.
“Many still believe that SA is not exposed to major weather risks and assume that the biggest and only threat to their assets is crime. As a result, we see significant levels of under-insurance and in some instances, where people live in secure complexes and estates, no insurance at all. This is based on the assumption that the threat of theft and burglary is highly unlikely. However, this completely ignores the fact that all outright losses of property and contents are typically the result of two perils, fire and flood,” said Barrett.
This has a significant impact on the public, regardless of whether they have insurance or not. “How does someone recover from an outright loss of their home when they still owe money on it, and have no insurance cover to replace the loss to return them to their former financial position? It points to the need to have a strong relationship with insurance brokers to meet to review needs at least every year and to follow the sound advice when it comes to insuring significant assets. Most of all, it highlights the folly in assuming that worst case scenarios are simply too unlikely to happen,” says Barrett.
Key business decisions
Barrett adds that for business owners, the considerations are the same. However, there are two additional and important factors to consider.
“From a business perspective, the increasing exchange rate puts the replacement value of imported plant and equipment in sharp focus. Consider the impact of replacing plant and machinery that was purchased when the exchange rate was R10 to the US dollar, versus the current exchange rate. This is one of the key factors in businesses finding themselves underinsured when it comes to replacing major plant and equipment lost as a result of an insured peril,” said Barrett.
She adds that business interruption cover is critical protection that is often ignored by businesses. What happens if the business is unable to trade for weeks or months as a result of a fire or flood at its plant or premises?
Editor’s Thoughts:
The very nature of insurance means that a person is purchasing cover for a loss event that may never happen. The fact that the public is taking a complacent view when it comes to weather related cover is concerning, especially when climate change is becoming such a significant risk. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
