Three years ago, my TV started packing up. It was old-ish in technology years, but it didn’t seem old enough to be giving up the ghost just yet, so I called my short-term insurer. The diagnosis: irreparable circuit damage. The culprit: load shedding. My TV was collected and replaced with a new unit that arrived, thankfully, two days before South Africa went into its three-month “21-day lockdown”.
Claims and more claims
My experience was far from an isolated incident. In October last year King Price reported that it had settled more than R21 million in claims over the previous 14 months resulting from power surges and dips predominantly caused by load shedding. “Over the last eight months we’ve seen an increase of more than 27% in claims for loss and damage to buildings, home contents and portable possessions due to power surges,” says Wynand van Vuuren, Client Experience Partner at King Price.
Other insurers have also noted a spike in load shedding related claims. According to Precious Nduli, Head of Technical Marketing and Marketing at Discovery Insure, the company saw a 50% increase in 2022, compared to 2021. Santam reported a 60% increase in claims for damage to sensitive electronic equipment due to power surges across their personal and commercial insurance portfolios for the first half of 2022. Meanwhile, Carl Greaves Insurance Brokers says load shedding related claims “have increased exponentially with no signs of easing.”
While damaged appliances are an obvious casualty of load shedding, there are also other consequences that are more sinister. “Burglaries and theft claims increase due to alarm batteries not functioning optimally,” says Marike van Niekerk, Legal and Compliance Manager at MUA. There’s a higher occurrence of motor vehicle accidents due to traffic lights failing during load shedding and power surges leading to fire claims are a reality. And the list continues.”
Unsustainable practice
The impact on the insurance sector has been significant. “The degradation and growing unpredictability of power supply from the grid has resulted in a drastic rise in the number of power surge claims that we have received. This has led to significant cost of claims for insurers in South Africa,” notes Nduli.
“It ultimately has an impact on the insurer loss ratio which necessitates either limiting power surge claimable amounts and / or imposing additional excesses,” adds Van Niekerk. “Some insurers might even exclude damage caused due to load shedding outright.”
Customer service has also been affected, as the sheer volume of claims puts strain on insurers’ systems, while the nature of those claims is anything but straightforward. Here, it is the intermediaries who are having to bear the brunt of the issue as they deal with frustrated and disgruntled clients. “We are inundated with claims, which are taking a lot of extra time,” says Carl Greaves. “They are negatively affecting loss ratios. The claims are resulting in many disputes with clients as it’s not an easy process, and insurers are requiring more and more evidence to prove a claim, which clients aren’t happy about.”
Claims, naturally, require investigation. But for customers already fraught with frustration over load shedding’s constant interference in their lives, this simple act of due process may feel like the last proverbial straw. “Many service providers simply state that it’s load shedding, even though it’s a 40-year-old appliance that has had enough,” says Carl Greaves. “So, it’s hard to accept all reports that come in and insurers request a second, which contradicts the first, so you have to obtain a third. By now your client is jumping up and down, saying that insurers are terrible. So, what do you do?”
Catalyst for change
The knee-jerk response to something as big load shedding’s impact on the insurance industry may be to view it as a disaster. Another point of view is that it’s been a catalyst for change. In the face of unprecedented adversity, anything – be it a way of life, a species or an industry – has two options: adapt or die. The insurance industry has already begun to adapt.
“The insurance industry is facing one of the most unprecedented claims environments in history, because of inflation due to the pandemic, severe weather conditions, load shedding and even high theft rates,” notes Nduli. “It is difficult for insurers to prepare for every eventuality or uncertainty but insurers who pick up trends and respond quickly are best placed to manage the risks individuals and businesses face. This requires adequate data that can be analysed to understand the extent of the issue and determine the required interventions.”
Many insurers are already thinking ahead, around innovative changes that could be introduced to mitigate the effects of load shedding. However, it takes time to accumulate and analyse the necessary data and for now, triage dictates that risk needs to be managed first.
“Innovation is the name of the game. With sufficient stats and actuarial pricing products might become available soon,” says Van Niekerk. “For now, risk mitigation is at the forefront and grid failure is top of mind.”
“There is definitely a need for innovation, and we are exploring options for our clients. For now, we encourage clients to take precautions to decrease the risk of power surge,” agrees Nduli.
It’s not only insurers who have been impacted. Looking at financial services more broadly, load shedding is affecting advisers as well. “Load shedding can affect financial adviser practices – typically small businesses. This may affect the distribution of insurance whether through online portals or advisers experiencing downtime,” says Nduli.
Ironically, this comes at a time when the advice industry is also undergoing a digital transformation, with many advisers switching to a hybrid way of working in the wake of the pandemic. In order for this way of working to be successful, advisers will need to invest in systems and tools to protect their businesses from downtime as a result of load shedding. This is especially pertinent as we head into winter, with fewer daylight hours.
Effect on consumer
Premiums are an obvious point of concern for customers, and they may indeed see their premiums increase. As Carl Greaves observes, if premiums don’t go up, the customer may lose insurance altogether because it will simply no longer be sustainable.
Customers also need to keep in mind that load shedding can impact their premiums in other ways.
“As many homeowners look to alternative energy sources and install generators, solar systems and battery/inverter systems, we’re also seeing an increase in the insured value of buildings,” observed Van Vuuren. “Alternative energy systems are expensive and will increase a property’s value. This means that the homeowner’s premium must increase at the time of the installation, to cover the additional risk.”
However, the effect of load shedding on premiums may not be as straightforward as customers might expect. “Yes, rates will increase for the peril, but in aggregate not the largest peril, so at a policy level, it will be a diluted increase,” says Reynier Rautenbach Head: Specialist Claims at Bryte.
Customers should also be aware that premium increases are not a certainty. “Whether premiums increase depends significantly on the frequency and severity of load shedding, as well as the claims experience of an insurer,” explains Nduli. “Premiums increase as a result of an unexpected increase in the cost of claims.”
“Clients with a history of high claims for power surge damage may face an additional increase,” adds Van Vuuren.
The other big concern for customers is the possibility that damage resulting from load shedding may be excluded entirely, leaving them with no recourse in the face of an ongoing threat. However, the insurance industry’s response to a situation like load shedding is a lot more nuanced, with various options on the table before the last resort of outright exclusion.
While Guardrisk’s personal lines book is relatively small and thus they cannot comment meaningfully on the trend, they are still keeping a close eye on the impact of load shedding on the industry as a whole and are being mindful of how it might impact their business, as well as the broader industry. “Guardrisk has not excluded power surges in its commercial policies and has been paying claims in this regard,” says Mark Joubert, Head: Guardrisk General Insurance. “However, since there seems to be no end in sight to load shedding it is expected that insurers will ultimately introduce exclusions and higher excesses for load shedding related claims, or as some insurers have done, classify this as a specific separate event and charge a commensurate premium for it.”
Might we see load shedding specific products come into effect in time to come? “Possibly,” says Rautenbach, “but there are a lot of unknowns at this stage about the true and full impact of load shedding and the consequential or knock-on effects will only become known in the future. As time passes, there may well be more products coming into the market.”
For now, customers should make sure that they’re adequately covered by their existing products. “Electronic items are covered for power surge damage in general,” adds Van Niekerk. “Some insurance policies have low power surge cover limits for minimal premium and have buy-up options available at additional premium. Some only impose standard basic excesses, and some add compulsory excesses.”
Customers need to make sure they have the right insurance in place to cover the various items that would be at risk from load shedding. “Home contents insurance covers everything that would fall out of your house if you turned it upside-down. This includes loose appliances and electronic items, like dishwashers and TVs.” explains Van Vuuren. “All the permanently installed (fixed) items, like air-con units and solar panels, are covered under buildings insurance. Other examples include gate motors, pool pumps and alarm systems. A portable generator would be covered under home contents but if it’s fixed then it would fall under buildings. Specified electronic items that you often take with you when you leave your property, like laptops and cell phones, are covered under portable possessions for loss and damage that occurs off the property.”
At a business level, businesses are finding ways to adapt. “Increasingly, businesses are proactively implementing alternative solutions to negate the effects of load shedding,” notes Joubert. “Not only in terms of installing alternative power solutions, like solar systems, generators and inverters, but also by revisiting their appetite for risk retention so that they can retain more risk and reap the benefits of their risk mitigation efforts.”
However, load shedding is a complex issue and he acknowledges that there are various scenarios that could play out, which the industry needs to be prepared for. “Having said all of this, total grid failure – and the impact that would have on business, ours and our clients’, remains a concern. Thus, many insurers are starting to limit non-damage perils, like grid failure, in their policies.”
Grid, interrupted
Load shedding is here to stay, and South Africans would be wise to plan for the long-term. It’s evident that the insurance industry cannot absorb the impact of load shedding by operating the same way it always has. The industry is having to adapt, and customers will need to adapt too. By meeting insurers halfway, customers can help ensure the sustainability of the industry and, thus, ensure that when they need insurance most, it will be able to pay out.
This includes taking steps to lower their own risk and thereby reduce their likelihood of needing to submit a claim. And that does not have to mean the very costly exercise of removing themselves from the Eskom grid. “Load shedding leads to power surge claims,” says Nduli. “Increased frequency in load shedding increases the risk of a power surge. The increased risk of power surge increases the likelihood of a claim. Power surge claims can be reduced through the use of power surge protection, which may reduce the likelihood of power surge claims.”
She recommends that customers protect themselves with simple measures such as getting a power surge protector for the distribution board, unplugging electrical appliances when the power goes off and using a power strip with a built-in surge protector for electrical appliances.
“Load shedding is going to be a challenge for a very long time,” says Van Vuuren. “We advise consumers to protect their appliances and electronic items by installing an uninterrupted power supply system on their distribution board, and to use surge protection devices at their plug-points.”
“It is important to always act as if you are uninsured,” says Van Niekerk. “Plan and protect your assets. Avoid using high-risk solutions, like candles for creating light and rather opt for the solar chargeable lights or loadshedding bulbs. Unplug your electronic items from the socket prior to electricity being shut off during load shedding and only plug them in about ten minutes after the power is restored. Keep this in mind when you leave your property unoccupied for longer periods – this might prevent a devastating fire claim. Make sure generators or back-up power systems are installed professionally. Safety first. Know what your insurance policy covers.”
Businesses also need to start looking at long-term solutions, and for many of them, generators are not the answer, says Volker Von Widdern, Principal of Strategic Risk at Riskonet. “There are several manufacturing businesses that require continuous power at high levels, which cannot be supplied by diesel generators. High levels of load shedding then make it extremely difficult to plan for continuous production runs because they are frequently interrupted. This may mean that raw material doesn’t complete certain stages of conversion and will be wasted because it cannot be re-processed, among other concerns.”
According to Von Widdern, strategic risk management should be aligned with the organisation’s strategic goals. This means that alternative methods of achieving economic results should be explored, particularly when a resource constraint such as power is a major risk. Medium to long-term planning for alternative power supplies and the support of utilities in order to keep manufacturing processes reliable should be explored, he notes.
“The cost of business interruption arising from load shedding is surely much higher than the cost of an industrial facility investing in renewable options, such as a gas turbine, which can then support the power needs of a regional node,” says Von Widdern. “Whatever the solution, we need to start taking matters into our own hands in a way that aligns with sustainable business practices and supports our strategic goals”.
Insurance in the new age
As the industry moves into an era of lasting load shedding, advisers and customers can expect to see changes to products, some of which have already started coming into effect. “We expect loadshedding to be a challenge for quite a while. Insurers that don’t provide cover for related claims will have to include it going forward, as it’s an unavoidable risk for consumers. It will lead to more expensive building and home contents insurance in future,” says Van Vuuren.
That may include mandatory installation of measures to mitigate risk. “Some insurers require power surge protection to be in place as an underwriting requirement for insurance cover,” says Nduli.
Customers who don’t have this in place may find they have to pay additional excess when they claim. “The intention of an additional power surge excess in the absence of surge protection, is not a punitive action but rather a measure to encourage policyholders to be proactive and responsible,” explains Van Niekerk. “Therefore, no additional excess will apply should the policyholder be able to prove that surge protection was installed and effective prior to a power surge claim.”
Load shedding has certainly been a massive upheaval, but as with any crisis, there are ways we can learn from it. “The environment we live and work in can change very quickly and have a very decisive impact on all of us,” says Rautenbach. “We can learn to be more adaptable, flexible, responsive, proactive and be solution minded. We have also learnt that we are able to survive a tough challenge such as the pandemic. We are resilient.”
He believes the industry may not change all that much right away, but we will begin to see the effects of load shedding on the industry in time to come. “The direct impact of load shedding will not affect the insurance industry in the short term since Insurers are communicating clearly to the market on the terms of policy response to load shedding related incidents,” he says. “In the medium to long term, more interaction between clients and the industry is expected. Risk insights will be gained by industry as time passes and clients will also approach insurers with specific requests regarding cover. Many clients are resorting to alternative power sources such as generators, solar and wind power. These create new opportunities and risks, both to be carefully considered to ensure a sustainable environment for the insurance industry to continue protecting clients.”
As the saying goes, the only certainty in life is change. And with change, there is inevitably a degree of uncertainty, which means risk. Fortunately, if there’s one thing the insurance industry knows how to do better than anyone else, it’s managing risk. The future will be different, but we won’t be in the dark forever.