Underinsurance - a key concern

South Africa is no stranger to the devastating losses of weather catastrophes. In the last few years, heavy rainfalls, flooding and wildfires have increased in frequency and intensity.

According to Aon’s 2023 Weather, Climate and Catastrophe Insight report, which identifies global natural disaster and climate trends to help make better decisions to manage volatility and enhance global resilience, natural disasters caused a $313 billion global economic loss during the 12-month period under review - 4 percent above the 21^st-century average - $132 billion of which was covered by insurance.

What the study reveals

Data shows that 2022 was the fifth costliest year on record for insurers, with approximately $50-55 billion of the global insured loss total resulting from Hurricane Ian in the United States - the second-costliest natural catastrophe in history from an insurance perspective, surpassed only by Hurricane Katrina in 2005, which resulted in nearly $100 billion in insured losses on a price-inflated basis.

The report also highlights that approximately 31,300 people lost their lives due to global natural catastrophe events in 2022. The total number of fatalities remains below average for now 12 years in a row; however, more than 19,000 of the fatalities were heat-related deaths in Europe alone, primarily as a result of heatwaves.

While a majority of total losses in 2022 were left uninsured, the 58 percent "protection gap" was one of the lowest on record, highlighting a positive shift in how businesses are navigating volatility through risk mitigation, and how insurers are providing further protection to underserved communities through access to capital.

"This report explores the events and costs of catastrophes and natural disasters in 2022 that created a staggering amount of economic loss," said Greg Case, CEO of Aon. "But this data also highlights a tremendous opportunity for us to continue to better serve clients. By working together on scalable solutions, we will not only mitigate risk, but bring together public, private and societal forces to accelerate innovation, protect underserved communities and strengthen the economy."

The Aon study examines resilience and the ability to overcome climate-related consequences – not only for physical risks, but in areas like the health of the workforce, reiterating the need to build multi-faceted strategies that account for climate change risk mitigation on all fronts.

Further findings of the report

Further findings of the 2023 Weather, Climate and Catastrophe Insight report include:

• 421 notable natural disaster events were recorded in 2022, higher than the 21st century average of 396.
• 75 percent of global insured losses were recorded in the United States, which was higher than the average of 60 percent.
• Windstorm Eunice was the costliest individual European windstorm since 2010, with $3.4 billion in insured losses. Widespread hailstorms in France contributed to the second-highest natural disaster pay-outs for the country on record of €6.9 billion ($7.4 billion).
• Droughts and heatwaves severely impacted Europe, the United States, China and other regions and global insurance pay-outs for the drought peril were the second highest on record, at $12.6 billion globally.
• Flood losses in Australia broke the historical record as La Niña conditions persisted for a third year and Sydney recorded the highest annual rainfall.
• Monsoonal floods in Pakistan had a far-reaching humanitarian impact on the country. In a summary of the 2022 monsoon season, the Pakistan Meteorological Department noted that country-wide rainfall from July to September was 175 percent above average.
• Both severe drought conditions and a prolonged rainy season in different regions of Latin America reduced agricultural crop yield across the region.

"The devastation that disasters caused around the world demonstrate the need for wider adoption of risk mitigation strategies, including better disaster management and warning systems that improve resilience," said Michal Lörinc, head of Catastrophe Insight at Aon. "While impacts of climate change become increasingly visible around the world, it is the socioeconomic aspects, demographics and wealth distribution that remain a major driver of financial loss. Data in this report will help guide organizations to not only enhance their own risk mitigation but take action to close the protection gap globally to better protect the communities in which we live and work."

According to Aon, underinsurance remains a key concern in the face of climate risks, especially when it comes to outright and severe losses which typically follow weather catastrophes like flood and fire. This trend is likely to come under increasing strain in a tough economic environment where costs are under scrutiny. The impact of an outright uninsured or even underinsured loss of a home and other assets can have severe financial and personal consequences.

Underinsurance and personal assets

“The trend of properties and assets being underinsured for their replacement costs was starkly highlighted in the devastating Knysna fires of 2017, and it’s a trend we see continuing as more households face serious financial constraints in the current economy,” explains Mandy Barrett of Aon South Africa, a global professional services firm and insurance broker.

“Many homeowners have not revisited the sums insured on their most valuable for many years, rendering the cover of these big-ticket items woefully inadequate in the face of an outright loss. Another trend we are seeing is that homeowners who have settled their bond account are opting not to insure their buildings in an attempt to cut costs. Many homeowners who live in security estates are reducing cover on their contents on the assumption that they are not at risk for theft or robbery, underestimating other critical risks such as fire and flood. What many people do not realise is that fire claims are one of the most common large loss claims - and most likely to end in an outright or catastrophic loss, with little if anything, that is salvageable. Similarly, the recent floods have demonstrated how entire homes and everything inside have been swept away, or disappeared under landslides,” she adds.

Underinsurance occurs when the insurance cover in terms of sum insured on your policy is not sufficient to cover the full cost of a potential claim and does not reflect the actual replacement value at today’s prices. The R500k home you bought 20 years ago is likely to be worth five times that amount today to replace. If you are underinsured in the event of a loss, you’re essentially taking the risk of the uninsured portion upon yourself. You may be paid partially for any loss at claims stage due to the average formula being applied. It means that if your property is underinsured by 50%, for example, then you may only be paid out half of your claim, regardless of whether it is a partial or total loss. 

Advise clients to review covers

Having a solid understanding of the implications of underinsurance is crucial at a time when many South Africans are financially strained and looking for ways to save on household costs.

Writer’s thoughts

While there is always the temptation to cut insurance costs in a bid to save money, the right approach, according to Aon, is to advise clients to review covers and right-size them to achieve better rates and cover, without exposing themselves to the risk of underinsured or uninsured losses which could prove financially crippling. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.