Mega fire losses force insurers to rethink thatch risk

Communications seen by FAnews suggest that thatch fire risk is the latest peril that local brokers may struggle to place on cover affordably, following a number of significant fire-related loss events in recent months. This adds to the growing list of asset and peril combinations that present challenges when quoting for new business or seeking to renew a policy. Example, brokers are already having to jump through hoops to get cost-effective cover on buildings in flood-afflicted zones. We reached out to a broker and insurer for some comment.

Concerns in commercial thatch risk segment

“We are aware of capacity issues in the domestic commercial thatch risk market; this is has come about due to some large thatch risk losses over the second half of 2023 and early 2024,” said Peter Olyott, CEO of Indwe. His observations, made towards the end of February this year, were supported by the country’s leading insurer, Santam Limited. “Yes, we are aware that certain prominent players in the market started to withdraw their capacity starting from the first quarter of 2024,” the insurer said. According to them, the capacity withdrawal was targeted towards all commercial thatch risks, including body corporates and estates. 

Santam noted that it had already seen an increase in the number of new business requests within the thatch segment, and that it still had both the appetite for and capacity to underwrite such risks. “We have responded positively to the increase in requests,” they said. FAnews countered with a three-part query to determine what limits might apply in this segment; what size of risk the domestic insurance industry would still have appetite for; and what risk mitigation efforts an insurer and its reinsurer partners would encourage before underwriting commercial thatch risks. 

“As with any risk or exposure, an increase in severity or frequency of losses will trigger a review of our appetite and subsequent limits,” Santam said. “We have seen several large losses which have prompted the decision by some of our competitors to exit the thatch segment, and while we are also in the process of reviewing our strategy, the immediate impact of this review is aimed at ensuring that our current underwriting requirements are adhered to”. The inference here is that this risk category is insurable provided that the insurer, working with brokers and clients, does the hard miles in the areas of risk identification and mitigation. 

Olyott said it was difficult to ascertain the limits and restrictions that might apply in the thatch risk segment going forward. He guessed that there would still be appetite for buildings cover for individual homes; but that large multi-thatch complexes would run into limitations and other issues due to the size of exposure and concentration of risk coupled with the nature of some of the recent domestic fires. “These on-the-ground experiences may have caused a rethink among insurers in terms of the traditional views on risk separation,” he said. 

Excesses plus building, firefighting rules compliance

One of the risk mitigation tools that South Africa’s leading insurers expects will play a big role in future commercial thatch risk underwriting is that of excesses. “Excesses will play a significant role in managing the overall exposure,” they said. “Building, firefighting and protection regulations will also need to be strictly adhered to for us to continue underwriting building risks, including thatch buildings.” Adherence to regulations remains a baseline for any risk accepted by Santam, and the insurer will continue to make the necessary changes to its underwriting criteria to facilitate the offer of viable and sustainable solutions to the market. 

Another angle that FAnews wished to explore was whether SA-focused reinsurers could eventually introduce a national treaty type exclusion or limitation on commercial thatch risk. From the brokers’ perspective, Olyott said he was unaware of any looming reinsurer-led national treaty exclusions, and merely confirmed that his firm had noted a diminished appetite for thatch risks. But Santam took a more circumspect stance, saying that reinsurers always reviewed their risk appetite following significant market losses. 

“We suspect that this review has occurred and could potentially be one of the reasons for the decision by some of our competitors to exit this segment of the market,” they said. The good news for domestic commercial insurance brokers is that Santam has not yet experienced any reduced support from its reinsurance partners. Nor did the insurer seem concerned that brokers would be unable to find commercial thatch risk cover, subject to the necessary risk mitigations being adhered to. 

Appetite for thatch risk should remain

“Santam is responding by ensuring adherence to underwriting requirements and building regulations, and we believe that the rest of the market is following the same direction,” they said. “Overall, if brokers support insurers in their drive to increase adherence to underwriting requirements and building regulations, capacity and appetite for thatch risks will remain.” FAnews wondered how brokers were responding to the possibility that they would not be able to place large commercial thatch risks locally. Could they reach out to international alternatives such as Lloyd’s or offshore reinsurers? 

“We are looking at solutions; but you have to understand the fundamental nature of thatch risk exposures and deal with these,” Olyott said. He pointed out that brokers and insureds had to ensure that the risk aspects were dealt with properly. Risk management begins with ensuring that the structure is compliant with national building regulations and other regulations such as SANS 10313, and that the thatch has been treated in accordance with requirements to ensure both the underside and top side have been protected. The fitting of an appropriate lightning conductor is a requirement in most cases as well. 

Finally, maintaining the electrical system of the building is a prerequisite for proactive risk management. One would also recommend that wherever possible, the various building compliance issues are dealt with prior to the cover being affected in order to avoid complications at the time of claiming,” Olyott says. 

A historically difficult risk class

For some additional context, Santam reminded this writer that thatch risks have always been a difficult risk class to underwrite due to the complexity and level of risk involved. “Underwriting such risks is  increasingly difficult during an EL Niño cycle, where we experience dry weather conditions which further perpetuate the spread of fire,” Santam said. The lack of infrastructure development and maintenance stood out as a major South Africa-specific challenge too. According to the insurer, inadequate water supply and the lack of operational capacity at many fire brigades was putting a damper on the industry’s fire risk appetite. 

“We will continuously work with our clients and brokers to ensure that internal risk mitigation measures such as firefighting capabilities are in place and work independently of municipal infrastructure where possible,” they concluded. As such, brokers should not be surprised to learn that commercial thatch risk covers may only attach subject to the client installing water storage and pumping solution or similar. 

Being FAnews, we offered the broker the last word. “It is worth noting that this is not the first time we have experienced the conflagration risks associated with a concentration of thatch dwellings in South Africa, in particular where winds have been a primary carrying agent of burning embers,” Olyott concluded. 

Writer’s thoughts:
The insurer’s contention that commercial thatch risks demand stricter risk mitigation protocols seems fair, but these mitigations can come at significant cost to insureds. Can your clients afford the fire risk mitigations being demanded by insurers? Or rather, can they afford not to afford them? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.