Beyond the uninsurable: ever-higher premiums are not the only answer for resilient businesses

Karen King, Climate Resilience Director at Atana

Yolandi Meyer, Disaster Risk Management Consultant at Atana

Climate-related disasters and the challenges of aging infrastructure are no longer abstract risks, they are reshaping the insurance landscape in Southern Africa. The 2022 KwaZulu-Natal floods highlighted this vividly, causing massive damage to businesses such as Toyota’s Prospecton plant in Durban. In a potentially precedent-setting move, Toyota’s Japanese insurer, Tokio Marine, has filed a R6.5-billion lawsuit against Transnet, the KwaZulu-Natal Department of Transport, and the eThekwini Municipality, alleging negligence in maintaining critical drainage systems.

For insurers, policymakers, and business leaders, this article, by Karen King, Climate Resilience Director at Atana and Yolandi Meyer, Disaster Risk Management Consultant at Atana illustrates the urgent need to understand and manage risk proactively, making it a compelling read for anyone interested in climate resilience and the evolving insurance environment.

Rising risks in Southern Africa

Escalating climate change, socio-economic challenges and deteriorating public infrastructure mean that more and more places in Southern Africa are becoming difficult to insure. 

Retreating from tough-to-insure regions will, however, mean insurance companies lose market share and trust. To prevent this, insurance companies need to become better at understanding and predicting risk, especially risk related to the effects of climate change and socio-economic challenges, and they need to use that knowledge to innovate, developing new products that address these risks.

The cost of inaction

Climate change is significantly increasing the frequency and severity of extreme weather and related events – floods, droughts, wildfires, hailstorms, winds, heatwaves and more. The catastrophic KwaZulu-Natal floods in 2022, which South African insurer Santam calculates caused R54-billion in economic losses, are a prime example.

The destruction these events wreak is leading to a sharp rise in insurance claims. In turn, to spread and deepen cover, insurers are raising premiums and excesses. In some cases they are effectively excluding certain high-risk areas from coverage. So to avoid declaring entire areas uninsurable, as has happened in Florida in the United States, where a series of powerful hurricanes has led to a mass exodus of private insurers since 2020, South Africa’s insurers are working with climate and disaster risk management consultants, such as Atana, to adjusting their practices and develop new products so that communities, including those that are the most vulnerable, have coverage.

But more expensive cover, coupled with South Africa’s socio-economic challenges, including high unemployment and a struggling economy, means many people are simply unable to afford higher premiums.

Consumers are also unable to rely on effective municipal service delivery, including good infrastructure maintenance, which exacerbates the damage from climate-related disasters. For example, one of the most effective ways to prevent, or at least lessen, flooding is to regularly clear stormwater drains.

In South Africa, the unreliability of public services, such as water and electricity, and poor infrastructure maintenance lead to more and higher claims for events such as power surges and burst pipes, which further strains the insurance system. This breakdown in governance and infrastructure, coupled with rising crime rates, creates a risk landscape that's becoming more expensive and challenging for insurers to underwrite, leading to a widening protection gap between economic losses and insured losses.

Lessons from Toyota and Transnet

A stark example is the massive damage to machinery and vehicles at Toyota's Prospecton plant in Durban during the April 2022 flood. In what could be a precedent-setting move, Toyota South Africa’s Japanese insurer, Tokio Marine & Nichido Fire Insurance, has filed a R6.5-billion lawsuit against Transnet, the KwaZulu-Natal Department of Transport and the eThekwini Municipality. 

Tokio Marine is seeking to recover the costs it paid out to Toyota for damages suffered during the 2022 floods. The Japanese insurer alleges that Transnet, the transport department and the municipality’s negligence in not maintaining drainage systems, particularly the Umlaas Canal, led to the catastrophic flooding. Toyota has since invested R236-million in protective measures at the plant and has resumed production. 

Building resilience for the future

How can businesses protect themselves in this socio-economic environment? The first step is to enlist experts to comprehensively define the risk. Draw up a “risk envelope” – a worst-case risk scenario, tailored to the area in which the business is located. With that in hand, a cost-benefit analysis of the possible mitigatory actions can be undertaken, and decisions on appropriate action can be made. 

Obviously, the more information that goes into these analyses, the better. Here, advanced software and even artificial intelligence is very useful. At Atana, we feed an immense amount of data from a wide variety of sources, such as satellites, meteorological offices and soil studies, into computer models and deliver a comprehensive picture of the potential risks related to a particular site. 

When it comes to greenfield developments, this kind of evidence gathering can go into climate-aware design that mitigates potential losses. However, there are a number of actions that can help businesses reduce their risk at established sites. Even seemingly small actions such as regularly cleaning litter traps or keeping water canals free of debris can improve a site’s risk profile, as the Tokio Marine litigation shows. 

There is a strong and evolving legislative mandate for integrating climate resilience into the planning, design and construction of infrastructure in South Africa. The combination of the 2024 Climate Change Act, the National Environmental Management Act, the Disaster Management Act, the National Infrastructure Plan 2050 and the United Nations’ Sendai Framework for Disaster Risk Reduction are shifting focus from a reactive approach to a proactive, forward-looking one that considers future climate scenarios in project development.

Given the intricate and escalating environmental and social challenges facing Southern Africa, we must BREAK continue to collaborate to ensure we use all the tools at our disposal to maintain insurance coverage, even in high-risk areas.

By embracing this proactive stance, businesses can reduce their exposure to losses and improve and maintain their insurability, building long-term resilience in a rapidly changing environment. This strategic shift is no longer a matter of choice but a necessity for survival and growth in the face of escalating uncertainty.

A broader lesson

This article underscores a broader lesson for South African businesses and insurers: in a rapidly changing risk environment, waiting for disasters is no longer viable. Proactive risk management, through careful assessment, infrastructure maintenance, and strategic planning, is essential to protect assets, maintain insurability, and ensure long-term resilience in an era of escalating uncertainty. 

Writer’s thoughts

The Toyota-Transnet case is a stark reminder that climate and infrastructure risks are no longer theoretical, they have real financial and operational consequences. Businesses that take proactive steps to understand and mitigate these risks will be best positioned to protect their assets and maintain long-term resilience. Do you agree? Please comment below, interact with us on X at @fanews_online or email me your thoughts at [email protected].

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