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Will inclement weather plague the insurance industry in 2014?

25 February 2014 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Over the past two years, South Africa has been experiencing a number of changing climatic conditions which has resulted in a significant change in weather patterns. This has seen traditionally mild hailstorms turning into violent storms, which have caused significant damage to vehicles and property.

This had a significant effect on the insurance industry. Towards the end of 2012, Santam reported that it received about 2 400 claims totalling about R35 million for hail damage to cars and homes in Gauteng and storm damage in Port Elizabeth. Over a corresponding period in 2013, Santam reported that it expected claims to be in the region of R60 million.

How does the industry recover from this?

Weather patterns are changing, which brings an element of unpredictability to the insurance industry. Weather events which used to only occur once every 10 years are now occurring once every two years, or even every year. The burning question within the short-term industry is the effects that these changes will have on the industry.

According to Alexander Forbes Insurance (AFI), the increase in weather-related claims is posing tough underwriting conditions for insurers who may have to consider hikes in insurance premiums, among other mitigating measures, to avoid underwriting losses.

In comparing 2013 to 2011, AFI MD, Gari Dombo, says that the company has experienced an increase in weather related claims of 75% in that three year period. "Although AFI has already received weather-related claims amounting to R8 million since 1 January this year, our approach for now will not be to implement across-the-board premium increases.”

Although the local insurance industry may have to consider premium increases to cover the costs of increasing weather-related claims, AFI says it will rather focus on performance based increases which would look at clients who have claimed frequently while trying to maintain inflation based increases for the balance. "We will continue to assess each client and the overall risk of policyholders individually. Generally however, we do expect rates to harden,” says Dombo.

Another strategy may be to sell specialised cover, such as hail and flood damage, as separate products. These products would come at a cost, which would then cover any possible underwriting losses.

What has been the result of the storms on the industry?

When one takes into account the pay outs incurred by Santam, one can gain a small insight into the cost impact that changing weather conditions is having on the industry. But is this effect the same for all insurers? Dombo points out that the short-term insurance industry is still reeling from the impact of extreme weather events in 2012, with insured losses suffered from flooding in Mpumalanga in January and a number of hailstorms in Gauteng, in October.

"The combined impact of 2012’s catastrophes, the flooding in Limpopo in January 2013, as well as flooding in the Western Cape in November will likely be seen in most insurers’ underwriting margins this year,” says Dombo.

Adverse weather also had a significant impact on the crop insurance market. In 2012, close to 90% of the farms in the Ceres and Witzenberg in the Western Cape suffered summer fruit crop losses as a result of hail storms while the increase in drought related insurance claims from farmers in certain parts of the Free State and the Western Cape, which have been declared disaster areas, has also impacted insurance underwriting.

"Some insurers have had to pull out of the crop insurance market as large weather related losses and high claims ratios have made it unsustainable,” says Dombo.

Global impact of catastrophes could force an industry rethink

Changing weather patterns have not only had a significant effect on the South African insurance industry. Globally, there have been significant floods in the UK, violent storms in the US and earthquakes in other parts of the world which have put pressure on insurance industries globally.

Dombo points out that according to Munich Re, with more than $119 billion in insured losses, 2011 was one of the costliest years in the history of insurance. In 2012, disasters including Hurricane Sandy cost the global insurance industry $50 billion, still above the 10 year average for the industry, all pointing to significant changes in weather-related risks.

What will the future hold?

Global warming and climate change is becoming a reality in the South African market. While the insurance industry hopes that 2014 will bring about a relief in violent storm activity, weather experts warn that such storms may become a regular occurrence.

We are already seeing the effects of this in 2014. Dombo points out that according to a statement by the Johannesburg Metro Police Department, 52 cars crashed during the heavy downpour in Gauteng this month in a space of six hours.

"Of the storm and flood claims received by AFI since 1 January, 40% by value were for damage to vehicles. Given the warning by the South African Weather Services that more rain can be expected in Gauteng until April and with the beginning of the winter rainy season expected in April in the southern parts of the country, we advise motorists to adopt certain risk mitigation measures that will keep them and their vehicles safe,” says Dombo.

Editor’s Thoughts:
Besides sending out pre-emptive warnings ahead of violent storms, there is seemingly not much that insurers can do to protect themselves against weather related claims. Perhaps this is one of the biggest focus areas that insurers need to focus on when coming to terms with such claims. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Ebbe Rabie, 26 Feb 2014
The Ceres hail was in 2013 and not 2012.
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Added by Fergus sings the blues, 25 Feb 2014
Global warming; and some Northern Hemisphere countries are experiencing significant cold spells, polar vortexes and blizzards?

JK.

Just curious what Dombo had in mind with "adopt certain risk mitigation measures that will keep them and their vehicles safe"?

The only thing that comes to mind is telling motorists to leave their vehicles at home and use public transport when there is a chance of rain? It makes no difference how cautious or conservative I drive/ride, because it takes just one clown who doesn't give a rat's posterior to undo all my best efforts.

Perhaps it would be better to go on a prolonged driver education and awareness campaign (which has to have the backing of Government or it is regretfully doomed). If you we could create a culture of courteous and considerate driving with mutual respect for fellow road users, perhaps we can start to turn the tide.

Government’s role would be there to enforce the existing rules of the road. The giving and taking of bribes should have harsh consequences. Enforcement should be fair. Penalties should be commensurate to the offence. For example, drunk driving should result in a minimum 3 year suspension of a driver’s licence with a hefty fine and 50 hours community service in the state mortuary. Transgression of the speed limits like those which caused Steve Hofmeyer and Julius Malema to be arrested should carry the same consequences as drunk driving.

Just a thought; and a time for action.
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Added by Elvis Beck, 25 Feb 2014
Climate change is real. There will always be uncertainty in understanding a system as complex as the world’s climate. However there is now strong evidence that significant global warming is occurring. The evidence comes from direct measurements of rising surface air temperatures and subsurface ocean temperatures and from phenomena such as increases in average global sea levels, retreating glaciers, and changes to many physical and biological systems. It is likely that most of the warming in recent decades can be attributed to human activities.
Climate change is already beginning to transform life on Earth. Around the globe, seasons are shifting, temperatures are climbing and sea levels are rising. And meanwhile, our planet must still supply us – and all living things – with air, water, food and safe places to live. If we don't act now, climate change will rapidly alter the lands and waters we all depend upon for survival, leaving our children and grandchildren with a very different world. The upward trend in temperature is undeniable, despite the effects of natural variability in the climate which causes the rate of warming to temporarily accelerate or slow for short periods, as we have seen over the past 15 years. If we do not cut emissions, we face even more devastating consequences, as unchecked they could raise global average temperature to 4C or more above pre-industrial levels by the end of the century. This would be far above the threshold warming of 2C that countries have already agreed that it would be dangerous to breach. The average temperature has not been 2C above pre-industrial levels for about 115,000 years, when the ice-caps were smaller and global sea level was at least five metres higher than today. The shift to such a world could cause mass migrations of hundreds of millions of people away from the worst-affected areas. That would lead to conflict and war, not peace and prosperity.

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