Record-breaking climate catastrophes in 2023 suggest the sustainability of short-term insurers are under threat. Here, what the industry needs to take heed of in order to remain viable in South Africa.
The sustainability of short-term insurers was again put to the test during 2023 when several climate change records were broken. Not only was it the hottest year on record, but Yale Environment calculates that the US experienced 25 separate one-billion-dollar-plus catastrophic climate events – a record – in 2023 and the average time between these disasters shrank to 10 days compared with 82 days in the 1980s.
Elsewhere in the world, the Turkey and Syrian earthquake was the year’s biggest humanitarian disaster and, according to reinsurer Munich Re, the catastrophe with the greatest insured losses of $5.5 bn (more than R100 billion). Drought, wildfires, and flooding were experienced in Europe and the East simultaneously during their summer season.
Scientific research has found that the most notable trend in 2023 was the distinct upward trend in severe thunderstorms and heavy hailstorms as a result of climate change. The frequency with which these weather events, known as severe convective storms, occurred in the US during 2023 was unprecedented.
South Africa had its own fair share of disasters, with the Western Cape floods and Ladysmith storms wreaking havoc on infrastructure and homes and the Gauteng earthquakes and hailstorm ratcheting up further insured losses that insurers must bear.
Impact on the insurance industry
In all, natural disasters in 2023 are estimated to have resulted in worldwide economic losses of about $250 billion (nearly R5 trillion) and insured losses of $95 billion (nearly R2 trillion), according to Munich Re. Climate analysts also point out that the year was characterised by higher frequency smaller and medium-sized events everywhere and all the time rather than mega-disasters. Adding extra pressure to the system is that, in response to the current CAT environment, global reinsurers have reduced the amount of cover offered to insurers, reducing the supply of a key “ingredient” in the insurance recipe.
Lloyd’s of London estimates that insurers are now having to pay out more than $100 billion (around R2 trillion) a year for natural catastrophe losses, with the burden on these costs threatening the bottom lines of non-life insurers globally after they already experienced a tough five years in terms of growth and profitability, particularly with rampant inflation severely affecting the sector since 2021.
Old Mutual Insure, for instance, saw a six-fold increase in catastrophe claims in 2023, with net catastrophe payouts amounting to approximately R400 million, making it the worst net of reinsurance catastrophe year for the insurer since inception. The insured losses of just three events during the year – namely the Western Cape and Paarl floods and the hailstorm in Johannesburg – racked up insured losses of more than R250 million. While the strong solvency position of Old Mutual Insure – and South African insurers in general – has not been affected by these events, some action is needed to ensure the future sustainability of the local insurance industry.
Weather catastrophes also put a strain on the entire value chain because there aren’t sufficient assessors to process claims, supplies of goods needed to repair the damage are limited, and there are not enough suppliers to complete the work timeously.
For instance, the storms in Ladysmith in KwaZulu Natal resulted in 200 claims coming through in three hours, which was equal to about five years’ worth of claims in that region needing to be processed and fulfilled. Insurers had to send additional assessors to the town, given the volume of claims, and contractors and goods had to be brought in from other parts of the country, often resulting in surge inflation.
Lessons for the future
With climate change expected to intensify in the coming years, it is critical that insurance companies prepare in advance for the insured losses likely to come through. Balance sheets and insurance solvency ratios will need to be actively managed and claims management will need to evolve.
As part of its journey of adapting to this climate-affected world, Old Mutual Insure has initiated a programme of catastrophe analytics to inform pricing of policies and, eventually, share information with communities situated in risky areas of South Africa. These measures to mitigate the growing impact of climate change on insurers’ financial viability include becoming more detailed in pricing potential flooding, hail, and wildfire catastrophe risk based on accurate data.
Insurers will also need to manage their exposure to these perils at an address, street and suburb level. Where insurers are overexposed, they will need to charge higher premiums, reduce exposure or potentially come off risk totally, as has been the case in several areas of the US. Given the frequency and severity of these catastrophic weather events, reinsurance premiums are surging, and more and more markets are becoming uninsurable. For instance, in the US, the biggest US insurers are no longer selling wildfire insurance in California, and many are abandoning Florida, where premiums are three times the average.
Looking to South Africa
The key is to avoid an insurance crisis in South Africa, as has played out in those states in the US where policyholders can no longer insure their homes and cars. Whereas Florida has a government insurer as a last resort, no similar mechanisms exist in South Africa. Another option is for the Regulator to license insurers to issue parametric insurance products in South Africa, which can offer climate cover in an innovative – and potentially cheaper – manner. For both these mitigants to become available, government support and action are required.
Policyholders also have a crucial role to play by managing their exposure to climate change and the damage it could do to their insured assets. Measures they can take include floodproofing their homes, putting in place early warning systems and remaining cognisant of the risks of buying property vulnerable to flooding because premiums are likely to increase in their areas to reflect the rising risks or, at worst, insurance may not be available at all. As pricing of risks becomes more sophisticated, increasing insurance costs should be taken as a signal of risk and those who responsibly mitigate risks will be credited for reducing those risks.
Last year’s relentless number of adverse weather events shows that climate change catastrophes are the new normal. To maintain the sustainability of insurers and ensure that policyholders can continue to get affordable insurance, all stakeholders, including brokers who advise their clients, the insured clients themselves and the insurers, will need to take proactive action towards reducing the risks of climate change into the future – or experience the destabilisation of this critical industry.