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The future of short-term insurance in the face of climate change



Climate change has become a greater concern as heat waves, hail storms, severe flooding and fires become a regular occurrence in South Africa. The effects of climate change are evident and, as consumers claim for damages due to natural disasters, the impact on the insurance industry is significant.

Globally, there has been a dramatic rise in both the severity and frequency of extreme natural events. Just recently, Zimbabwe and Mozambique experienced Cyclone Idai and the estimate damage is more than $1 billion of destroyed infrastructure. The insurance industry has accepted that climate change is becoming alarming and, as such, they have to address the climate-related risks in their underwriting, business operations and reserves.

Insurance risks associated with climate change

The overall financial risk does not only lay with the payment of more frequent and severe claims to members, but also on the higher re-insurance premiums that will be imposed on the business by reinsurers.

Insurance risk assessment will need to include climate change as a component in its management of future risks. As such, when insurers assess risks for clients, weather patterns and their potential effects on insurable assets must be a component in an underwriter’s estimation of future risk.

Another important component is pricing, which will have to reflect the underlying weather-related risks. In this way, the insurer can influence clients to reduce their exposure to climatic risks through the differentiation in the pricing of insurance premiums. As an example, a policy holder can receive a reduction in their premium if they take appropriate measures to protect their insured property against climatic risks such as flooding and hail. By the same token, a policy holder may face a higher premium if they choose to develop a project in an area prone to climatic risks such as floods and droughts.

Impact of climate change on business and economy

In recent years, we have seen that insured losses [claims] as a result of the damage from the natural disasters can pose economic disruptions affecting insurers, the economy, and the wider financial system. The insurance “protection gap” for weather related losses remains significant with most losses uninsured – resulting in significant burden on households, businesses, and governments.

Currently, many insurers are actively seeking to update their product offerings, risk management processes, and governance processes relating to climate change risks, through using predictive methods and enhanced risk modelling. As climate change progresses, and its effects are becoming increasingly clear in the form of extreme weather events, insurers will be presented with increasing numbers of property claims. In order to build resilience in their service offerings, insurers, clients and intermediaries need to collaborate and be more proactive on how they mitigate risks.

Both insurers and intermediaries should be in a position to assist with the mitigation of corporate property risks with the aim of ensuring that proactive risk management is specific and relevant to both the industry sector insured and the actual risks. While reinsurers and insurers can model exposure, the actual risk presented is largely influenced by engineering decisions made by the corporate entity.

Short-term insurance market

With that said, the short-term insurance market is expected to face major challenges over the next few years. The South African short-term insurance premium volumes increased by 17.8% between 2016 and 2017, and the potential exists for short-term insurers to significantly increase their gross written premiums by 2020. Furthermore, market players surveyed in South Africa and other African markets are anticipating a considerable growth in both the life insurance and short-term insurance markets over the next years.

However, growth will ultimately be dependent on the market’s flexibility to adapt to the changing insurance environment, and it will be imperative for insurers to take economic, social transformation, and the risks associated with climate change into consideration going forward.

At PPS Short-Term Insurance, we constantly look to improve our understanding of the potential impact that climate change can have on our business.