Insurers face a toll from severe weather events
Gerhard Diedericks, Santam Head of Agriculture, the Santam Group
Pieter Visser, a Catastrophe Analyst at Aon South Africa
Susan Walls, Technical Adviser at the South African Insurance Association (SAIA)
Over the years South African weather patterns have increased in severity and weather-related damages have cost, and continue to cost, the insurance industry billions in losses as insurance claims pour in.
From flash floods – the El Nino weather pattern (dry, low rainfall conditions) and La Nina (high rainfall), to golf ball sized hail, raging fires and to what media called a “mini tsunami” at the Durban beachfront, extreme weather conditions are causing havoc and highlighting how vulnerable we are to the changing weather patterns. What’s important to also note is that the South African Weather Service reported that the El Nino weather pattern could return in the spring.
As home and business owners count the costs associated with these damages, insurers bear the brunt of the costs as they usually run in thousands, if not millions. FAnews spoke to a few insurers about their concerns for 2017.
It’s in the numbers
“It is clear from the flood losses in November 2016 that pluvial and flash floods add to losses, substantially. Though these losses appear to be random, the flood risk exposure that transpired in Edenvale was related to buildings and structures in close proximity to drainage channels or river beds. During high rainfall events, these drainage systems are overwhelmed and can lead to substantial losses. We were also reminded how fast an empty reservoir can fill and we were fortunate that the rain abated once the Vaal dam system filled up, avoiding downstream floods,” says Pieter Visser, a Catastrophe Analyst at Aon South Africa.
“The floods in November 2016 amounted to about R700 million in market losses with the impact of the flood events in Gauteng affecting insurers across the board. Commercial claims were more prominent during these flood events compared to previous hail events. With hail events, personal lines insurers were more affected. The market was fortunate to not have experienced many flood events in the past 10 years, but it’s noteworthy that commercial properties may be more at risk than residential properties during flash floods,” continues Visser.
According to Gerhard Diedericks, Santam Head of Agriculture, the Santam Group paid out more than R16.1 billion in claims over the 2016 period, this included more than R500 million in claims for catastrophic events such as flash floods and hail storms over the period.
Visser says most insurers in South Africa have suffered three or more catastrophe claims in the last year. “The reason for this is two-fold. Firstly, the level or retention in the South African market is extremely low compared to the international norm. This leads to the perception of a high frequency of catastrophe events, while low retentions are sought to curtail volatility. Secondly, the country experienced more storm-related losses during the normally dry winter month's, in the North. Losses are increasingly driven by local risk conditions that are driving underwriting to become more locale-specific.”
A cause for concern
“The impact of these events on consumers is a major concern to insurers. An increase in the number and severity of claims resulting from these events would impact the cost of claims and this could result in an increase in premiums insurers have to charge the consumer. In the current economic climate many consumers can ill afford any additional expenses and might consider cancelling some or all of their policies. This in turn would have a negative impact on insurers,” says Susan Walls, Technical Adviser at the South African Insurance Association (SAIA).
Walls said SAIA is aware that its members have recorded increases in flood and drought claims however are not able to provide statistics.
Conditions after the drought
Diedericks says South Africa is known for its highly variable climate conditions and severe weather events. “The ever present concern is that farmers are ill prepared for such catastrophic events or are underinsured against such risks and perils. Another concern is the possibility of another El Nino event for the 2017/18 season. It is especially the frail agricultural sector that is still recovering from drought in previous seasons that can again experience a setback.”
“Although there has been a considerable amount of rainfall in certain areas in recent months, drought is expected for certain regions in 2018 putting additional strain on farmers,” says Walls.
Seeking out the positives
“The favourable rainfall conditions that occurred in the very crucial production months of January and February this year resulted in very favourable summer crop production conditions and recovery of grazing conditions. Farmers are expecting record yields in many areas. The main concern for farmers is the very low commodity prices. The price of maize for delivery in July is now below R2000/ton which is far away from the close to R5000/ton earlier in the season,” says Diedericks.
Visser said, “The crop estimate committee just announced in March 2017 that the estimated maize crop is expected to be more than 14 million tons compared to 7.3 million tons for the previous year.”
“In many instances, the winter crop in the Eastern Free State assisted farmer’s cash flows after the severe drought last year. Farmers in the Western Cape are still under stress due to the severe drought in the region. Fruit production regions are dependent upon irrigation and the lack of water is a serious concern,” continued Visser.
Diedericks says “Farmers must consider a different approach to manage their risk. Farming with water and not crops is a risk managing tool. Farmers must only plant with sufficient water in the soil to ensure a good start to a season. Farmers must also be more conservative in terms of planting density, row width and type of cultivation.”
Editor’s Thoughts:
Sound risk management is a critical element in this industry. With the ever changing and unpredictable environment it is important for brokers and insurers to actively advise clients on risk management strategies to assess and control risks. Do you agree with this? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected]
