Your clients will get nothing if the electricity grid goes pop

After 200-plus days of loadshedding in 2022 and Stage 2 or higher each day this year, South Africans are gatvol. Unfortunately, the ongoing threat to the national power grid has caught the attention of the country’s short-term insurers too, forcing them to start the New Year by informing brokers and policyholders of yet another general cover exclusion. Those familiar with the workings of the insurance industry will not be surprised to learn that insurers and reinsurers consider a national electricity grid failure to be uninsurable.

The shrinking cover universe

The new general exclusion comes hot on the heels of insurers’ decisions to restrict their exposure to power surge damages claims, which they have achieved by either limiting sums insured or increasing exclusions. As a result, clients are lining up at local brokerages, waving policy schedules and shouting: “What the heck is still on cover on this agreement?” To understand what insurance cover is still available for power-related damage, we must first distinguish between loadshedding, national grid failure and power surge. Loadshedding is something that all South Africans know and understand as a rotational power outage that occurs when the ailing power utility, Eskom, is unable to meet demand. 

Suburbs are divided up and assigned to one or other loadshedding area and will then experience electricity outages, referred to as Stages or Levels, based on the extent of Eskom’s shortfall. The writer, for example, falls under area 11 in the Tshwane municipality… And all suburbs in this area will experience between one and two two-hour-long outages per day under Stage 2, and between two and three such outages per day under Stage 4. The point is that when loadshedding occurs in his suburb, around 85% of the country still has electricity. Loadshedding is designed to prevent a national electricity grid failure or catastrophic collapse of the entire grid. The experts say it would take Eskom between five and seven days to restart the grid following such failure! And power surge? Well, that is the spike in power that may occur when sub-stations are returned to service post loadshedding. 

Forget KISS, the insurers have got this…

Insurers have a slightly different take on loadshedding versus electricity grid failure, as illustrated by the definitions contained in their policy wordings. Hollard Insure, who recently informed brokers of an electricity grid failure exclusion that applies to both commercial and personal lines policyholders, and is ‘in force’ from 1 April 2023, describes an electricity grid failure as: “An interruption to or suspension of electricity supply, in any manner and from any source, and for any reason (including damage and any inability and / or failure on the part of the supplier) which affects an entire municipality (including local, district, regional or any other level that is created by law) or province or the country at substantially the same time, including any interruption, power surge or suspension at the reconnection or reinstatement of electricity supply”. 

And loadshedding: “The intentional, total or partial, withholding of electricity supply (from any source) by any party other than the insured implemented in phases which do not affect a municipality (including local, district, regional or any other level that is created by law) or province or the country at substantially the same time”. These definitions are pretty wordy and, at first glance, fly in the face of the regulator’s long-standing attempts to get financial services providers (FSPs) to use simple language; but at least insurers are being proactive in communicating cover changes. The question remains how to respond to a personal lines client when they ask whether or not there is coverage for loadshedding. We approached Santam, who shared the following comment: 

Yes, loadshedding does lead to damages claims

Load shedding or blackouts are not an insurable risk under an insurance contract. However, insurers like Santam do offer cover for damage to sensitive electronic items that are caused by power surges. Power surges and dips happen as a result of loadshedding, leading to damage to electrical and electronic equipment in your home. When load shedding stages increase, so does the frequency of the rotational power cuts, which has a replica impact in increased risk of damage to sensitive electronic items due to power surges, fires and crime. 

Although load shedding and / or blackouts are not an insurable risk under an insurance contract, the damage to home contents caused by power surges is often covered by insurers; but this is dependent on the individual product. Attie Blaauw, Head: PL Underwriting at Santam said that brokers should revisit clients’ insurance policies to ensure they have sufficient cover in place. “In some cases, cover is included, and in other cases it is an optional add-on for which the appropriate cover limit must be selected,” he said. “The power surge cover limit should also be reassessed regularly to ensure all new electronic equipment is covered for the correct replacement value”. Of course, the advice around cover for power surge following a loadshedding event is irrelevant in the context of the decision by insurers to fully ring-fence their businesses from liability in the event of an electricity grid failure. 

Introducing the general electricity grid failure exclusion

“Santam confirms that it is implementing a general electricity grid failure exclusion on all our policies,” said Blaauw. “The grid failure exclusion has been introduced on the back of unprecedented levels of loadshedding and pressure from global reinsurers that require Santam to reduce our exposure to business interruption claims arising from failure of public utilities and public telecommunications”. He added that for personal lines clients, this exclusion affected existing cover provided for spoiling of contents of refrigerators and freezers [and] also gave clarity that any unforeseen damages, direct or indirect, resulting from a grid failure would not be covered. 

Santam has included this grid failure exclusion on all new business quotations requested from 1 January this year and will implement same on existing policies from date of renewal, starting from 1 April 2023. The insurer has also taken additional steps to restrict its exposure to business interruption claims in the commercial space. “In addition, cover limits are being introduced for business interruption on business policies due to failure of public utilities or public telecommunications services, with an indemnity period of three months; premiums will be revised to reflect the reduced coverage limits,” Blaauw said. The bottom line, in the event South Africa suffers a near apocalyptic national grid failure, your clients are going to be on their own. 

These R30 billion plus losses are unsustainable

Local non-life insurers have experienced some massive claims years of late. First, they faced business interruption liabilities in the wake of the 2020-2021 COVID-19 pandemic and national lockdown; then they had to assist state-owned special risks insurer Sasria SOC Limited to process the flood of unrest-related claims that followed the July 2021 looting debacle. And last year, saw a handful of large value natural catastrophe events, most notably the April 2022 KZN floods. 

“The national grid exclusion and other policy revisions introduced in recent months reflect the unprecedented shifts in the risk environment over the past year,” concluded Blaauw. “While we wish the extent of our actions was not necessary, the complexity of risk increasingly showcases the value of the intermediary and the benefit that can be gained from helping clients to structure the most effective risk management solutions”. Santam called on policyholders to discuss changes with their intermediaries or directly with their insurer, but there is no reason why brokers and risk advisers cannot be proactive and give their clients a call.

Writer’s thoughts:
The experts say that a national grid failure is unlikely, and that Eskom has become quite skilled at managing the country’s energy distribution balance. Unfortunately, that does not mean that you can rule out a catastrophic failure of the electricity grid. Are you comfortable with telling your clients about this general cover exclusion for national grid failure? And how would you advise clients to prepare for such an event? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comment on this Post

Name*

Email Address*

Comment*

 

Submit Comment