Risks to the ‘built environment’ affect the financial services industry

Fiona Zerbst, FAnews Online Editor

South Africa’s built environment is facing increasing risks, be it from climate change, rapid urbanisation or challenges to our water and energy infrastructure. The fact that these risks affect the insurance industry has not gone unnoticed. Both the South

The Strategic Risk Forum looks at how risks can be mitigated through the lens of environmental, social and governance (ESG) risks.

Barry Taylor, Chairman of the Short-Term Committee of the FIA, says that there are a number of stakeholders involved, including experts in their own fields outside the insurance industry. “We need more stakeholders on board, though, like town planners, local authorities and so on,” he says. “Insurance is just one part of the solution but we also need to look at the broader risk management cycle, which includes proper planning, maintenance, and prevention.”

Threats to infrastructure

There are multiple issues here – in fact, if you’ll excuse the pun, we can expect something of a snowball effect as further issues arise from discussions about risks to the built environment.

“The built environment is critical in terms of providing the long-term investment opportunities that the long-term insurance industry needs to meet its stakeholder obligation of matching assets and liabilities,” says Johan van Zyl, CEO of Sanlam. Without sufficient and functioning infrastructure, government can’t deliver on its service mandate – we know that municipalities have been buckling under the weight of providing water, sanitation and electricity to rapidly growing urban populations.

Add climate change to the picture and you have increasing threats to existing infrastructure – short-term insurers are particularly worried about the impact of higher global temperatures and erratic weather, like severe storms, which have an impact on their insured book.

For these reasons, the Strategic Risk Forum is likely to have its hands full as it seeks to manage a multitude of risks. Its view is that local government should focus on the built environment risk, while financial services organisations – driven by their representative bodies – should focus on skills transfer and collaboration with local authorities.

Spreading the risk appropriately

Debbie Donaldson general managers, strategy and planning at SAIA, says that the long-term sustainability of the insurance industry is a shared opportunity for many stakeholders. “The ability to provide multi-peril crop insurance is an issue affecting food sustainability, but as we know only 17% of the planted surface area in the commercial sector is insured and insurance cover in the small-scale sector is negligible,” she says.

Taylor says governments in many places in the world subsidise some of the premiums to increase affordability. How can some of these premiums be subsidised in South Africa, at least in part, so that crop insurance becomes affordable?

Donaldson confirms SAIA’s support of the Department of Agriculture, Forestry and Fisheries and National Treasury-led investigation into an agricultural insurance framework for South Africa as part of food sustainability and farming, which is a positive step for the South African agriculture sector.

“Insurance is an important industry and this becomes clear when we look at damage created by hail, flooding and so on,” says Taylor. “Insurance is the first and last resort when your house has been swept away in a flood, for example. But one also has to look at what could have prevented that flood in the first place. Was the house built in a high-risk area? It’s all very well that, when all else fails, insurance companies come in and pick up the pieces, but if proper infrastructure was put in place to begin with, some of these risks could have been mitigated. This is why all stakeholders need to collaborate and plan ahead.

Data can play a crucial role here – wider collaboration and sharing critical data can contribute to risk reduction. For example, creating and sharing a national water map would allow stakeholders to assess flood and water risks, and thereby prevent problems that can be prevented with proper planning.

Editor’s thoughts:
ESG issues are often shoved aside in the pursuit of profit, as we all know, but increasing risks to the built environment mean that we need to think about some of the systemic risks inherent in our infrastructure. In fact, our investments in construction, agriculture and energy are also subject to risk if the broader ESG issues are not borne in mind. MD of BASA, Cas Coovadia, has urged various associations to challenge their members to change the way they conduct business. “Executives at these member companies must identify the blockages that exist in the built environment and apply Financial Services Charter (FSC) funding to break down these barriers,” Coovadia says. Should investors be paying closer mind to ESG and, by extension, CRISA, which puts responsible investing at the forefront of investment decision-making? Comment below or email fiona@fanews.co.za