Grid collapse? Insurers might not cover you.
Insurance companies have for the past week been informing their clients that they cannot protect them against a collapse of the national electricity grid and that should that occur, policyholders cannot claim for damages.
South Africa has endured unprecedented levels of load-shedding as utility Eskom’s limping power stations struggle to generate enough energy to meet demand. In a recent media briefing former chief executive André de Ruyter said Eskom was in the process of reviewing its documentation and schedules that govern stages of load-shedding and “forming contingencies for if the country hits stage eight”.
This has led to speculation of a possible grid failure, a systemic risk against which insurance companies cannot protect their clients, according to Soul Abraham, chief executive for retail at Old Mutual Insure.
“Similarly, reinsurance companies will not offer insurance companies protection against systemic risk,” Abraham said.
Systemic risk refers to the likelihood of the breakdown of an entire system rather than the failure of individual parts. It is a risk that could trigger severe instability or collapse an entire industry.
Reinsurers started pushing for this cover to be excluded fully from 1 January and have signalled that they will not be able to provide it in future.
Old Mutual introduced grid failure exclusion in 2022, effective for new policies from 15 August 2022 and effective from 1 November 2022 for the renewal of existing cover in its personal lines and commercial business.
With the unprecedented level of load-shedding implemented over the past 12 months, Old Mutual Insure has registered a significant increase in claims, especially relating to power surges, Abraham said.
“Power surge claims are increasingly becoming difficult to insure. Insurance companies are in the business of managing risk, and when the frequency and severity of claims increase, it can impact the availability and affordability of insurance coverage,” Abraham said.
Not even the South African Special Risk Insurance Association (Sasria) can cover individuals and businesses in the event of a grid failure or grid collapse.
The state insurer has previously stated that it would not be liable should there be grid collapse. It said: “Sasria does not cover consequential loss as a result of a severe level of load-shedding or complete blackout.”
Sasria is also not providing cover for load-shedding-incurred damages, saying that after payouts on claims relating to July 2021 riots that rocked parts of KwaZulu-Natal and Gauteng “Sasria does not yet have the capacity to include other categories of disasters”.
Budget Insurance has become one of the latest insurers to announce its exclusion of grid failure cover, in the wake of similar moves by Santam, Hollard and Outsurance in recent weeks.
“Loss or damage as a result of grid failure has never been stipulated as an insured event. However, as of 1 April 2023, we will be updating our terms and conditions to explicitly indicate the exclusion of grid failure from cover,” Budget Insurance said in a note to clients.
“While grid failure itself is not covered, normal insured events, as stated in your terms and conditions, are covered. For example, if you are involved in a vehicle accident due to a traffic light not working — as a result of grid failure — your vehicle cover will still apply.”
Insurers are saying they cannot quantify the risk of a grid collapse or grid failure because it would cripple the insurance industry since each and every sector of the economy would claim for damages, said Ahmore Burger-Smidt, a director at law firm Werksmans. Insurers simply don’t have the balance sheet for that.
“Twenty years back we could not even have contemplated the situation we find ourselves in South Africa,” she said.
“When the actuaries sit and formulate premiums based on risk they have to consider what position it leaves the insurance company. In a sense one can understand that they need to protect themselves but also one has to think about the public interest and what is the interest of the public in terms of that.”
The legalities around whether premiums should be reduced if the insurer no longer covers grid failure all depend on the contract clients signed when requesting cover.
According to Burger-Smidt, the terms allow service providers to amend the benefits or pricing based on changing market conditions.
“What is important from a Consumer Protection Act perspective is that notice should be given to the consumer with at least a 30-day notice period to leave the consumer in a position where they can decide whether they continue with a relationship or not,” she said.
The wording on the terms and conditions should not be ambiguous and it is the insurance companies’ responsibility to draw aspects of the contract with the terms and conditions to the attention of its clients, she added.
Consumers should be able to enter into an agreement where they understand those terms and conditions. “This is a core aspect. And if this is just thrown at consumers at the last minute and it happens that consumers are confronted with this thick document then they end up just signing the document without carefully considering the content of the terms and conditions. That is problematic.
“There is a Consumer Protection Act for a reason that talks about fair, equitable and reasonable contract terms,” Burger-Smidt said.
“There isn’t really equality in power between the consumer and the insurer. For all those people who never properly read their terms and conditions, somewhere in there it would state that they [insurers] have the ability to change their terms and conditions.”
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