Business under duress as drought conditions reach crisis levels

19 February 2018Gary Ferguson, Aon
Gary Ferguson from Aon South Africa’s Technical Claims Resolution Division.

Gary Ferguson from Aon South Africa’s Technical Claims Resolution Division.

The drought in the Cape region is the worst in over a century and no business sector will escape the consequences. Businesses will need to adapt to what is becoming a new normal as the effects of climate change take hold.

According to Gary Ferguson from Aon South Africa’s Technical Claims Resolution Division, business insurance policies are designed to cover sudden and unforeseen events. “It is crucial for businesses to understand what exclusions exist in their insurance policies relating to utilities such as electricity, water and gas being withheld, or in this scenario, water being completely unavailable.”

Drought is generally not considered to be an insurable event under a business insurance policy. “A good approach to mitigating the risk is to review possible claim scenarios with your broker,” says Ferguson. “A professional broker will generally run a test scenario to assess the impact of any given event on the risk management strategies employed by a company. Not only will it ensure that the insurance policy responds favourably in the event of a loss, but it will also highlight any exclusions and gaps in cover that may be present,” he adds.

A number of industries are being severely affected by the drought:

• The ability of beverage producers to maintain adequate stock levels in the absence of water is highly questionable.
• Heavy machinery relies on water in the production phase to keep equipment running at an optimal operating temperature, where a lack of water can seriously affect production levels.
• Power generation is heavily dependent on water, specifically hydro-electricity, coal and nuclear plants, with a mass water shortage posing a threat to the power grid.
• Building projects are also at risk as a key raw material on any construction site is water in the form of concrete, plaster mixes and brick manufacturing plants, to name a few.

The agricultural sector, which provides approximately 6% of employment and contributes 2.5% to South Africa’s GDP, is being decimated by the drought. “Insurance companies that provide cover for farmers remain limited and the cover and services are restrictive. Agricultural insurance policies are typically taken out by commercial farmers, spelling catastrophe for small scale farmers without cover,” Ferguson explains.

Some of the realities facing the agricultural sector:

• Farmers are forced to cull their livestock to avoid a loss and suffering due to lack of water, diminishing the quality and quantities of stock, not to mention a reduction in turnover. Early culling influences future breeding stock of the farmer and future production levels.
• Farmers are diversifying their operations to more robust livestock, such as game farming, different types of crop or even making a debut in new markets such as tourism.
• Grape production of world-class wine farms in the Western Cape is also under stress, resulting in lower yields and less wine production. Vinpro reported that a decline of 1% in the 2018 harvest translates into a R50million decline in income at the producer farmgate.

The drought is forcing businesses to think differently, with new technologies emerging such as desalination plants and precision farming with advanced data, analytics and modelling. Some sectors, specifically in mining are investing in water purification plants to recycle water utilised during production.

“Growing population rates and shifting climate patterns make future predictions about our natural resources uncertain at best. It is clear that we need to explore new technologies and use advanced data analytics capabilities to gain a better understanding of risk exposures and the domino effects of our rapidly changing and unpredictable climate and environment,” concludes Ferguson.

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