A new era of risk – insurance in a changing climate

Thabiso Rulashe

Over the last couple of years, we have seen an increase in both the frequency and intensity of climate-related disasters.

These have accelerated at a rapid pace, creating both a physical and socioeconomic divide in terms of risk exposure and protection. At a global level, insurance premiums for physical risks and natural catastrophe protection are set to increase by 50% by 2030, reaching $200 - 250 billion.

South Africa has traditionally been viewed as a relatively low-risk environment for natural disasters, but this is no longer the case. Last year, we faced particularly adverse weather and fire-related claims, as well as exposure to the Türkiye earthquake losses. In the Western Cape, floods cost Santam R403 million, while the Gauteng hailstorm added R180 million. Fire claims reached R422 million, marking a nearly 9% increase from 2022.

The upward trend has continued into 2024. During the first half of the year, Santam covered R607 million in weather-related claims for policyholders, a significant jump from R150 million in 2023. The growing frequency of extreme weather events will inevitably become more expensive for the industry and create affordability challenges for households and businesses in the future.

At the same time, this trend exacerbates the protection gap, disproportionately affecting low-income communities. The protection gap – the difference between economic losses and insured losses – is a global issue that heavily impacts emerging economies and poorer populations, where most losses remain uninsured. Narrowing this gap is vital for building resilience and mitigating the social and economic effects of extreme weather events.

While the global protection gap recently narrowed to 60% - one of the lowest on record, according to global reinsurance broker, AON – South Africa’s protection gap continues to expand. In the EMEA region, which South Africa is part off, the protection gap is 83%. Unfortunately, harsh macroeconomic factors such as low economic growth, rising unemployment and the cost-of-living crisis continue to place pressure on the consumer, further exacerbating this gap.

Insurers need to recognise that each unprotected asset represents a potential setback, impacting not only individuals but entire communities by diminishing their capacity to recover from catastrophic events. It is up to us, as insurers, to educate both clients and intermediaries to understand the changing nature of risks and weather patterns, and their impact on the value chain. This includes raising awareness around the challenges we face and encouraging proactive change.

The evolution of climate risk is clear in the regulatory landscape as well, with mandates for climate-related disclosures, such as the Task Force on Climate-Related Financial Disclosures (TCFD) and Sustainable Finance Disclosure Regulation. Progressive climate regulation and stakeholder pressures have also acted as a driving force in encouraging action towards climate change. To comply with these standards, insurers are challenged to improve the quality of their data, embed climate risk assessments into underwriting, and support green business models.

For insurers, data-driven innovation is key to creating solutions that match the pace of climate change. Using advanced technologies like predictive analytics, geocoding, and scenario analysis allows us to better understand risks and set premiums that reflect the shifting landscape. However, the demand for resilience goes beyond product design; it requires a proactive approach to partner with communities and stakeholders, fostering mutual understanding and collaboration.

Santam’s Partnership for Risk and Resilience (P4RR) programme reflects this commitment. By working with local municipalities and research bodies like the Council for Scientific and Industrial Research (CSIR), we aim to support the development of climate adaptation plans in vulnerable communities. We also focus on collaborative data-sharing and risk assessments to build predictive capabilities that inform disaster preparedness. This systematic approach emphasises the importance of early warning systems and proactive risk management, improving emergency response and disaster management capabilities within these communities. This partnership-based approach highlights insurance’s dual role as a risk manager and an enabler of public safety, financial inclusion, and sustainable development.

Ultimately, the role of insurance in the changing climate is clear: we are here to provide financial protection and resilience against increasingly frequent and severe weather-related losses, helping individuals, businesses, and communities recover and adapt. By focusing on partnerships, innovation, and accessible solutions, we at Santam aim to support sustainable growth and bridge the protection gap across the communities we serve.

In this new era of risk, we challenge the industry to rise to these responsibilities because our choices today will shape our resilience of tomorrow. Every initiative, every product, and every partnership can contribute to a more resilient future – one that ensures our collective ability to withstand and recover from the shocks of a changing climate.