As climate worries mount and our environment rapidly shifts, industries face tough new obstacles. One standout is the insurance sector, feeling the squeeze from both changing customer needs and more frequent natural disasters.
FAnews spoke to Thabiso Rulashe, Executive Head of Strategy and Investor Relations at Santam Insurance, about how climate-induced trends are shaping South Africa's insurance industry.
Rulashe provided valuable insights into the impact of extreme weather events, economic losses, and the widening protection gap, offering a glimpse into the industry's efforts to navigate these climate-related challenges.
Trends in South Africa
Similar to the global trends, Rulashe said that climate change-induced extreme weather events have remained elevated in the last decade. These have proved disruptive to both economic and social activities.
“According to the global reinsurance broker, Aon, the 2023 economic losses due to natural catastrophes were 22% above the 21% century average. The effect of climate change in South Africa has created further unpredictability and uncertainty in weather patterns,” added Rulashe.
“In the past few years, the country has experienced prolonged drought periods, intense rainfall activity leading to floods, bursts of hailstorms and wildfires. These events have tended to be severe and extreme, and they pose significant threats to livelihoods. Whilst the impact of climate change varies by region, the interior of Southern Africa is understood to warm at twice the global average rate and heatwaves have become a common occurrence. The coastal cities have experienced a significant increase in the frequency of flooding. Flooding in urban areas is driven by both natural and human factors and has been compounded by poor drainage and infrastructure decay,” Rulashe continued.
The impact on the insurance industry
Whilst the industry has over time withstood the evolving risk landscape, Rulashe mentioned that each year natural disasters and extreme weather events continue to increase in frequency and intensity resulting in widespread losses and damage to infrastructure.
“The impact of natural disasters is multi-faceted. This includes the insurance industry having to look at the financial resilience and as well as the ability to honour claims. The accompanying losses have continued to exacerbate the insurance protection gap and resulted in the market experiencing significant increases in reinsurance costs, which in turn may lead to premium increases,” said Rulashe.
“The unpredictable nature of natural disaster events also means that the ability of underwriters to effectively measure, predict and price risk will be affected. It may lead to premium increases in vulnerable areas which may impact affordability issues. We have observed that in the US, this has become a real issue, where some insurers are limiting or pulling cover from fire and flood prone areas leaving homeowners with limited cover options,” emphasised Rulashe.
The protection gap in South Africa
Firstly, Rulashe said, the protection gap (the difference between economic losses and insured losses) is a global phenomenon. “It largely affects emerging countries and the poor, in general, as most losses in those segments are still uninsured. This is likely to continue to be a challenge. Having said that, insurers and governments have an important role to play in expanding insurance coverage. Globally, the protection gap stands at 69%, meaning about $262bn of economic losses were not covered in 2023 (source AON). Within the EMEA region, which South Africa is part of, the protection gap is 83%. In the context of South Africa, the protection gap is further exacerbated by macroeconomic factors such as low growth, rising unemployment and cost of living crisis to mention a few. These factors continue to place pressure on the consumer, further widening the protection gap.”
“Swiss Re estimates South Africa’s natural catastrophe protection gap to be $0.5bn. Public-private partnerships have been earmarked as an essential response mechanism in facilitating the protection of vulnerable communities. Furthermore, the insurance sector has a role to contribute to resilience and to narrow the widening risk protection gap. The aspects that need to be considered are to lower access barriers and to develop solutions that drive financial inclusion. Narrowing the protection gap is vital to contribute to resilience benefits and help to reduce the social and economic impact of extreme weather events,” emphasised Rulashe.
Risk assessment and coverage
Responding to the increased frequency and severity of climate events by raising premiums to build larger reserves to cover likely future payouts is no longer the only feasible solution, according to Rulashe. “As a first measure in response to the increasing events, industry players need to improve their understanding of their exposure to risks and opportunities associated with the changing climate. One way to do this is by conducting climate scenario analysis which will help organisations to test the resilience of their business against different climate conditions. Partnering with academic institutions and key experts in mitigating climate risk exposure is also becoming increasingly important.”
Rulashe added that the use of enabling technologies and innovative risk transfer mechanisms that can aid towards building the resilience of societies prone to natural disasters has become essential. “The use of predictive analytics alike such as geospatial tools will also go a long way in providing insurers with more detailed assessments of where wider protection is needed or where exclusions need to be implemented.”
“The traditional insurance approaches that are predominantly based on historical loss figures need to be complemented by adopting the use of Big Data and Artificial Intelligence (AI) to develop more nuanced views of risk exposure is key to improving the industry’s analysis of climate trends. This will, however, mean investing in and implementing robust data governance to further enhance current risk management processes. Importantly, the industry must invest in human resources and proactive risk management practices,” continued Rulashe.
Innovative products and strategies
Enhancing data-driven decision frameworks, risk transfer solutions and the adoption of parametric insurance solutions are but a few of the mechanisms that the industry can use to address the economic impacts of extreme weather events and disaster, according to Rulashe.
“The ripple effect of this will be felt by clients who through the adoption of innovative products will, to an extent, be cushioned from the effects of the changing risk landscape. The adoption of these technologies, however, is not without any red tape and the industry needs to play an active role in advocating for an enabling regulatory environment to facilitate innovative product development,” said Rulashe.
“Understanding client needs is paramount to offering tailored product solutions. In the context of heightened extreme weather events in South Africa, both brokers and insurers need to educate the client by assisting them to understand the nature of the risk they are exposed to and simultaneously offer de-risking solutions. This is particularly true in the context where we are seeing the nature of risks changing,” concluded Rulashe.
As the climate crisis escalates, the insurance sector stands at a critical juncture, facing unprecedented challenges from extreme weather events and a widening protection gap. The path forward demands not only strategic foresight but also a collaborative effort to bridge the growing protection gap and safeguard against future uncertainties. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
Sources:
https://assets.aon.com/-/media/files/aon/reports/2024/climate-and-catastrophe-insights-report.pdf
https://www.swissre.com/institute/research/sigma-research/sigma-2023-02.html
https://link.springer.com/article/10.1007/s10708-021-10460-z#citeas
Get the latest issue of FAnews
Comment on this post