What's Happening?

Big changes in insurance coverage risk causing economic harm



The chickens are coming home to roost for all stakeholders in the South African non-life insurance sector, as insurers and reinsurers adjust their operational and pricing approaches to accommodate three years of significant losses. SA-based non-life insurance intermediaries are increasingly concerned over the responses being imposed on their clients by the industry, in many instances being led by reinsurers globally. Increased premiums, reduced covers and – in some cases – historic perils being removed from the scope of cover are adding to the cost of doing business in a country that is already struggling with slow economic growth.

The insurance sector has been called upon to respond to a number of crises in recent years, beginning with the COVID-19 pandemic in March 2020. In the months that followed, the industry faced court challenges; discussions around insurers’ and reinsurers’ cover intentions and policy wording interpretations; and many un-envisaged exposures. Suffice to say,  the COVID experience was difficult for the industry as whole, and all stakeholders have been hard at work to integrate pandemic experiences into their respective businesses and business models ever since.

South Africa’s non-life insurance industry suffered two additional ‘shocks’ following the pandemic. First, in July 2021, we experienced civil unrest and looting the likes of which had not been seen domestically since 1976. The loss and damage to insured property in areas of Gauteng and KwaZulu-Natal (KZN) dwarfed all previous losses, placing the state-owned special risks insurer, Sasria, in a precarious financial position. Then, in April 2022, the country suffered what has since been described as the costliest local flood event ever, this time along the KZN coastline. The South African government, insurers and reinsurers pumped billions of rand into the local economy following these mega loss events.

South Africa has spent much of 2022 and early 2023 battling the effects of sustained bouts of loadshedding, and at higher levels than ever before. This new normal for electricity supply has raised the spectre of a potential public grid failure, moving this catastrophe up the risk spectrum from ‘highly unlikely’ to ‘quite possible’. International reinsurers have learnt some hard lessons since 2020, so few were surprised when they started insisting that local insurers include grid failure exclusions in their insurance contracts. These exclusions insulate the insurance industry from all losses directly or indirectly due to, or in consequence of, electricity grid failures, with the result the financial burden of grid failure shifts to businesses and households.

It is difficult to argue against reinsurers’ cover restrictions given that they are designed to ensure the long-term sustainability of the sector. Samantha Williams, Head of Regulatory and Legal at the Financial Intermediaries Association of Southern Africa (FIA) has, however, commented that concerns raised by international regulators regarding the growing protection gap confirms an urgent need for engagement with government and regulators to find solutions for clients.

The FIA has had its work cut out to ensure that its intermediary members are up to speed on frequent changes in insurance coverage. In her address to the 2023 FIA Road Show, FIA President, Butsi Tladi, confirmed the growing need for businesses to be aware of the changing risk landscape, and for intermediaries to be at the forefront of structuring holistic risk solutions. Intermediaries and insurers have responded by undertaking extensive reviews of the emerging risk exposures their clients / customers face.

Case in point, it recently emerged that the flood zone data generally in use to price insurance cover was perhaps outdated. New data shows that a number of properties, owned by individuals and businesses, are located within one-in-100-year or one-in-200-year flood zones. Future-based studies by, inter alia, the CSIR, show that certain areas of South Africa are likely to experience more intense storm patterns into the future. As your intermediary can explain, insurers are within their rights to limit flood covers in instances where potential losses become certain. Clearly, cooperation across all stakeholders is required to identify and proactively mitigate flood risks, and hopefully make some of the exposures insurable again.

Imagine, if you will, what the aforementioned developments mean to an imaginary business owner based in KZN or the Eastern Cape, who has the misfortune of being situated in or near one of the identified flood zones. This business cannot get flood insurance; the available Sasria cover to protect against civil unrest and looting is limited to ZAR500 million per annum; and its manufacturing plant – which relies on an integrated computerised production process using water, various chemicals and vast quantities of electricity – is affected by the recent grid failure exclusion.

One of the alternatives available to this business is to reduce its risk exposures through significant investments in back-up power and water infrastructure, fire protection systems and even flood alleviation measures; but the current state of the economy, rising operating costs and the many uncertainties associated with doing business locally make it difficult to justify such expenditure. The result is that many businesses re seriously considering relocating their businesses to other provinces, or even offshore. In the latter case, the local economy loses an employer and South Africa loses a corporate taxpayer.

Whose job is it to try and find solutions to this situation? Some suggest that the insurance sector should step up and shoulder the responsibility, others reckon it is government’s job – whether at the national, provincial or local levels.

The truth is that saving businesses and creating an environment conducive to economic prosperity is a national responsibility; we all have our role to play. In matters of national interest – in this writer’s opinion – the veil of competition between industry sector players should be lifted to allow for a collaborative approach to problem solving. Businesses must work together to identify and tackle shortcomings that exist at the local, regional and national levels with the long-term objective of creating a sustainable economic and social environment. Failing this, our generation will preside over a rapid decline in private sector investment, countrywide.

Does South Africa have the experience, leadership and skills to overcome these challenges? Definitely! Should we immediately attend to this situation? Yes, because time is not on our side. Do we have the collective will to act? Well, that remains to be seen, but we can scarcely afford further delays. As intermediaries, we turn to our association for guidance on approaches to economic matters.

FIA CEO, Lizelle van der Merwe recently commented that the FIA remains committed to working with industry stakeholders to find solutions, including improved risk management strategies, without interfering with free market conditions. She suggested focusing on improved risk management and oversight as well as data quality to ensure better underwriting outcomes. The bottom line is that the FIA – as the recognised association for independent intermediaries in South Africa –  stands ready, willing and able to contribute to solutions in the national interest, and looks forward to working with other insurance sector stakeholders to solve this and other ‘national interest’ dilemmas.