Massive dangers lurk for municipalities

A lack of adequate insurance cover, insufficient infrastructure and poor risk assessment measures means many local municipalities are opening themselves up to massive liabilities in the event of natural and man-made disasters such as fires, floods, crime and litigation.

According to Colly Mata (pictured), national manager of the local authority department at Lion of Africa Insurance Company, which insures over 50% of municipalities in South Africa, unlike in the apartheid days, when municipalities were the responsibility of national government, they are now responsible for managing their own finances, including the protection of assets. These include buildings, motor vehicles, equipment, stadiums and even roads.

Mata says that one of the biggest financial risks to municipalities is in the underinsurance of these assets. “More than 60% of local municipalities around South Africa are underinsuring their assets at present. This situation could spell financial disaster for these municipalities as the insurance cover paid out could fall well short of the liability incurred as a result of the damage or destruction to assets.

He notes that some of the most underinsured municipalities are in KwaZulu-Natal and the Eastern Cape. “Many municipalities in these areas do not have huge coffers and cannot afford to sustain losses as a result of underinsurance.”

He points to a recent incident in Kwazulu-Natal, where floods caused damages to the tune of R100 million. The local municipality in the area was woefully underinsured and were therefore responsible for the shortfall in cover.

“It is important for municipalities to spend time with their insurance brokers to get a better understanding of the risks associated with their municipalities and the level and extent of cover required.”

Mata says one of the biggest contributing factors resulting in underinsurance is that municipalities do not undertake a regular valuation of their assets. So while a building may be insured for R1 million based on a valuation done five years ago, the real replacement value in today’s terms could be closer to R5 million.

He says it is also crucial that municipalities understand the terms and conditions of their insurance contracts. “Sometimes clients don’t read the policy wording and therefore do not claim in accordance with the policy terms. For example, sometimes clients wait six months to claim for a loss incurred, which is generally outside the stipulated reporting period for a valid claim.”

He says different regions also face different insurance physical hazards. “For example, in the Western Cape, every year in summer there is a high probability of damages as a result of veld fires which municipalities need to insure against. On the Highveld, lightning and hail storms are major risks while Kwazulu-Natal can experience severe flooding following rainstorms.

He adds that a lack of proper risk assessment of assets is also a problem in some municipalities. “This is especially acute with the insurance for power stations, transformers and switchgears. Here we find that in many municipalities, these assets are old and poorly maintained. These factors increase the probability of something going badly wrong resulting in mechanical breakdown, power outages and fires. Not only can this affect service delivery, but can also result in non-payment of insurance claims when damages occur that could have been prevented.”