In 2022, KwaZulu-Natal was hit by the most catastrophic floods on record, which led to 459 fatalities. Photo: Delwyn Verasamy
South Africans living in disaster-prone areas will be forced to pay more as insurance companies hike premiums for climate change-related cover and claims.
According to a source in the industry, many insurance companies have been revising their policies to get away from paying maximum claims related to natural disasters caused by climate change.
“The rise in climate change has taught insurance companies that they need to protect themselves from permanent closure.
“It is not a secret that the Kwa-Zulu-Natal floods early this year cost insurance companies a lot of money. Remember, back in the day, South Africa didn’t have these disasters that are occurring. Now, anything can happen, so the companies are in a process of redrafting their policies to get clients to cover more of the damage through their premiums,” the source said.
According to experts, South Africa is set to see more severe weather events, such as heavy rainfall and extreme drought, as climate change affects the country.
Many insurance companies are updating their policies to increase premiums for customers living at the coast and areas earmarked for flooding and other natural disasters, in particular.
Earlier this year the South African Reserve Bank noted that climate change would probably increase the frequency and severity of physical climate-related risks. This increase would translate into increased claims, particularly in the non-life insurance sector.
“In the long term, it is possible that insurance and reinsurance [insurance companies getting insured by other companies] could become more expensive and product offerings could be limited in areas that are more exposed to the effects of climate change,” it said.
“Underwriting actions to address the increase in claims frequency, and claims inflation, have been implemented since the start of 2022. The difference with this round of underwriting is that most clients in the coastal areas might be paying more because living or owning a business in the coastal region will fall under the high-potential risk for insurance,” the source added.
Santam chief financial officer Hennie Nel said natural disaster damage was something they would continue to cover.
“However, premium rates could be impacted by increased natural disasters. Areas that are prone to natural disasters might become more expensive to insure,” said Nel.
He said insurers were collecting data from past claims to better understand their risk exposure in all areas they insure.“We have developed models to understand trends and potential changes in future claims due to natural disasters, like flooding. For example, property in regions prone to higher incidences of flooding will be more expensive to insure than those in lower-risk areas. KZN is one of the areas with the highest incidence of flooding in South Africa, which already results in higher premiums,” he said.
Nel said premiums were “very likely to increase” over time, as there were more climate change-related disasters.
The Reserve Bank noted the flooding in KwaZulu-Natal in April had caused significant damage to infrastructure, with the provincial government estimating the cost of repairs to be in the region of R17-billion.
“The flooding is another shock to the domestic insurance industry that is still recovering from the lingering impact of Covid-19-related claims and the July 2021 unrest,” it said.
The Nelson Mandela Bay municipality in the Eastern Cape is battling as taps run dry due to a multi-year drought, while flooding has caused havoc in large parts of KwaZulu-Natal, North West and areas of the Western Cape.
Nedbank’s managing executive for investment banking Brad Maxwell said climate change was an existential threat to South Africa’s economy and ecosystems.
“From the deadly storms that pounded KwaZulu-Natal in early 2022, to periods of extreme drought, we are vulnerable to the increased frequency and severity of extreme weather events. All too often, the broader impact of climate change affects impoverished communities the most severely.”
He added that insurance companies were hoping to get direction from the climate bill that is before the National Assembly.
“This will ‘institutionalise’ responsibilities for climate change action within the three tiers of government. This, in turn, gives insurers direction on how to navigate the risk factor.
“Overall, SA is probably better positioned in terms of policy and strategy than many other countries in the region,” he said.
Nishen Bikhani, a partner at KPMG SA, added that because insurance companies themselves are insured by other insurances [reinsurance] they were under pressure to amend their policies to exclude pandemics and natural disasters, as it was done during Covid-19 lockdown business losses.
Many insurance companies were forced by the courts to pay lockdown-related business interruption claims.
Santam said the floods in KwaZulu-Natal qualified as a “one-in-25-year event”, according to its internal modelling, and these floods were “by far” the largest natural catastrophe in South Africa’s insurance history.
The Global Risks Report 2021, published by the World Economic Forum, revealed the top four risks that are systemic in nature were extreme weather events, climate action failure, human environmental damage and infectious diseases. Extreme weather has been at the top of this list since 2017.
Bikhani said the higher-than-expected frequency and severity of natural disasters would potentially reduce reinsurance coverage.
Insurers rely on reinsurance cover to hedge their unknown losses arising from factors such as pandemics. However, he added that in a few instances reinsurers were rejecting claims made by insurers.
John Kotze, Old Mutual’s head of product and protection, said reinsurance helped companies stay afloat in cases of disaster. The concept dated to the shipping industry in the 1600s.
“If there were a lot of local storms, it might impact lots of ships in one region. So, if there was a way for insurance risks to be spread across all the ships in the whole world, then that would reduce the regional insurance risks that might arise from time to time.
“This concept was extended to the life and short-term insurance sectors. Without insurance, many businesses will close as they will not be able to get a payout because of hail, fire and flooding,” he said.
Insurance companies have called for the SA Special Risk Insurance Association, a government entity that provides cover for loss or damage to insured property due to terrorism, political violence, strikes and riots, to add natural disasters to the list as climate change threats increase.
South African citizens living in disaster prone areas will be forced to pay more as insurance companies hike their premiums for climate change related cover and claims.
According to a source in the insurance industry, many insurance companies have been revising their policies to get away from reaching maximum claims caused by climate change disasters.
“The rise in climate change has taught insurance companies that they need to protect themselves from permanent closure. It is not a secret that the Kwa-Zulu-Natal floods early this year cost insurance companies a lot of money, now remember that back in the days South Africa didn’t have these disasters that are occurring, now anything can happen so the companies are in a process of redrafting their policies to get clients to cover more of the damage through their premiums,” the source said.
According to experts, South Africa is set to see more severe weather events, such as heavy rainfall and extreme drought, as climate change affects the country. Many insurance companies have moved to updating their insurance policies to increase premiums for customers living by the coast and areas earmarked for flooding, and other natural disasters.
How premiums will be calculated
Earlier this year the South African Reserve Bank (SARB) noted that climate change will likely increase the frequency and severity of physical climate-related risks. This increase, coupled with possible geographical concentration risk, could translate into increased claims particularly in the non-life insurance sector.
“In the long term, it is possible that insurance and reinsurance [insurance companies getting insured by other companies] could become more expensive, and product offerings could be limited in areas that are more exposed to the effects of climate change,” it said.
The source added that insurance companies will use underwriting actions – the process insurance companies use to work out risk.
“Underwriting actions to address the increase in claims frequency and claims inflation have been implemented since the start of 2022, the difference between this round of underwriting is that most clients in the coastal areas might be paying more because living or owning a business in the coastal region will fall under the high potential risk for insurances,” the source added.
Santam chief financial officer Hennie Nel said that natural disaster damage is a peril that they will continue to cover.
“However premium rates could be impacted by increased natural disasters. Areas that are prone to natural disasters might become more expensive to insure,” said Nel.
Nel said insurers were collecting data from past claims to better understand their risk exposures in all areas they insure.
“We have developed models to understand trends and potential changes in future claims due to natural disasters like flooding, for example, a property in regions prone to higher incidences of flooding [and higher-trending areas] will be more expensive to insure than
those in lower-risk areas. KZN is one of the areas with the highest incidence of flooding in South Africa, which already results in higher premiums,” he said.
He said to the extent that climate change increases such disasters in future, premiums are “very likely to increase” over time.
Natural disaster impact
The Reserve Bank noted that the localised flooding in KwaZulu-Natal during April 2022 caused significant damage to infrastructure, with the KwaZulu-Natal provincial government estimating the cost of repair to be in the region of R17 billion.
“The flooding is another shock to the domestic insurance industry that is still recovering from the lingering impact of Covid-19-related claims and the July 2021 unrest,” it said.
The Nelson Mandela Bay municipality in the Eastern Cape is battling as taps run dry due to a multi-year drought, while flooding has caused havoc in large parts of KwaZulu-Natal, North West and areas of the Western Cape Province.
Nedbank’s managing executive for investment banking, Brad Maxwell, said climate change is an existential threat to South Africa’s economies and ecosystems.
“From the deadly storms that pounded KwaZulu-Natal in early 2022 to periods of extreme drought, we are vulnerable to the increased frequency and severity of extreme weather events. All too often, the broader impact of climate change affects impoverished communities the most severely.”
He added that insurance companies are hoping to also get direction from the climate bill that is sitting before the National Assembly.
“This will ‘institutionalise’ responsibilities for climate change action within the three tiers of government. This in turn gives insurances direction on how to navigate the risk factor. Overall, SA is probably better positioned in terms of policy and strategy than many other countries in the region,” he said.
What to expect from insurance companies
Nishen Bikhani, a partner at KPMG SA added that because insurance companies themselves are insured by other insurances (known as reinsurances) they are under pressure to amend their policies to exclude pandemics and natural disasters, as it was done during Covid-19 lockdown business losses.
Many insurance companies were forced by the courts to pay lockdown-related business interruption claims.
Santam said the floods in KwaZulu-Natal qualified as a “one in 25-year event”, according to its internal modelling and these floods were “by far” the largest natural catastrophe in insurance history.
The Global Risks Report 2021, published by the World Economic Forum revealed the top four risks that are systemic in nature are extreme weather events, climate action failure, human environmental damage and infectious diseases. Extreme weather has been at the top of this list since 2017.
How insurers stay afloat
Bikhani said the higher-than-expected frequency and severity of natural disasters, will potentially reduce reinsurance coverage.
Insurers rely on reinsurance cover to hedge their unknown losses arising from pandemics;
however, he added that in a few instances reinsurers were rejecting claims made by insurers.
John Kotze, Old Mutual’s head of product and protection, said reinsurance helps companies stay afloat in cases of disasters, a concept that dates to the origins in the shipping industry in the late 1600s.
“If there was a local storm, it might impact lots of ships in one region, so if there was a way for insurance risks to be spread across all the ships in the whole world, then that would reduce the regional insurance risks that might arise from time to time.
“This concept was extended to the life and short-term insurance sectors. Without insurance, many businesses will close as they will not be able to get a payout because of hail, fire and flooding,” he said.The insurance companies have called for the South Africa Special Risk Insurance Association (Sasria), a government entity that provides cover for loss or damage to insured property due to terrorism, political violence, strikes and riots, to add natural disasters to the list as climate change threats Increase. Sasria currently does not cover claims related to natural disasters.
Extreme climate events in South Africa
Mandisa Nyathi, Sheree Bega
South Africa is no stranger to the devastating impacts of weather-related hazards like floods, wildfires, storms, heat and droughts. Here are some of the most recent climate-related events the country has experienced.
Floods
In May this year, the World Weather Attribution initiative found that climate change made the deadly flooding in April in KwaZulu-Natal more severe. The floods caused around 448 deaths, displaced thousands of people and destroyed homes and infrastructure. Scientists found that the probability of such an event happening has approximately doubled because of human-induced climate change.
In 2019, Pretoria recorded more than 200mm of rain in 48 hours. The floods left cars and buses submerged and residents trapped in buildings. It also caused widespread power cuts.
Drought
In 2018, the Western Cape experienced drought after three years of poor rainfall, the city announced drastic action was needed to avoid running out. Analysis by the World Weather Attribution initiative, too, has determined that the 2018 drought in Cape Town and surrounding areas was three times more likely because of climate change.
Fires
The 2015 Cape wildfires were a series of wildfires that burned across the Western Cape from February to April 2015. Major fires burned across the Cape Peninsula starting on 1 March in Muizenberg and burning until 9 March, when firefighters extinguished it.
The Knysna fires in June 2017 cut a path of devastation which resulted in the largest number of buildings destroyed by fire ever in South Africa and the tragic loss of seven lives, including four people engaged in firefighting.
Extreme weather
Earlier this year, a report by the Mo Ibrahim Foundation found that over the past 12 years, South Africa has endured the most extreme weather events out of all African countries, recording 33 disaster events between 2010 and 2022.
It ranked South Africa as among the top 10 countries with the largest number of flood events (16) during the same period on the continent. It was also one of the top 10 countries in Africa for the largest number of drought events (four). “South Africa is the only African country affected by five out of the six types of extreme weather events analysed … (droughts, floods, landslide events, extreme temperature, storms and wildfires),” it noted.
South Africa, according to the report, is among five African countries affected by both floods and droughts in the same 12-year period.
Heatwaves
Earlier this year, Max Hererra, a climatologist reported that Cape Town hit a whopping 45.2C. There are also reports that in June this year, the city recorded it’s highest ever temperature for that month. With this heat comes the risk for wildfires which the city is at risk for.
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