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Grim Forecast

ARTICLE BY

  • Soul Abraham
  • Chief Actuary
  • Old Mutual Insure

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As climate change shakes the insurance industry globally, could KwaZulu-Natal be facing its California moment?

The global insurance industry is facing an unprecedented crisis as climate change fuels an alarming rise in weather-related catastrophes. South Africa is also grappling with a dramatic shift in its catastrophic event (CAT) landscape. At the epicentre of this transformation lies KwaZulu-Natal, a province increasingly drawing parallels to California’s insurance woes.

Gathering storm

In the first five months of 2024, short-term insurers have already had to contend with damaging windstorms in Cape Town, South Africa, unprecedented flooding in Southern Brazil, floods in Indonesia, deadly floods in Tanzania and Kenya, deadly floods in China, unprecedented floods in Dubai, Oman, Bahrain, and Qatar and a powerful earthquake on the island of Taiwan.

Ronald Richman, Chief Actuary at Old Mutual Insure, paints a stark picture of the situation. The 2024 experience comes off the back of last year’s 10 South African weather-related claims events, with three significant incidents causing millions of rands in damages.

This rising trend in weather catastrophes is not isolated to South Africa. Globally, severe convective storms accounted for 68% of insured natural catastrophe losses in the first half of 2023. In the United States, thunderstorms led to a staggering $34 billion in insured losses during the same period – an unprecedented level of financial damage in such a short time.

KwaZulu-Natal: South Africa’s California?

As the insurance crisis unfolds globally, KwaZulu-Natal (KZN) is emerging as a focal point of concern within South Africa. Soul Abraham, Chief Executive of Retail at Old Mutual Insure, draws a sobering comparison between KZN and California, where major insurers have begun withdrawing coverage due to escalating climate risks.

Between July 2016 and January 2024, KwaZulu-Natal experienced 10 significant floods. The most recent disaster in early 2024 claimed over 45 lives, severely damaged 250 houses, and inflicted an estimated R37 billion in infrastructure and business losses. This relentless sequence of catastrophes mirrors the challenges faced by California, where wildfires and floods have forced insurers to reassess their presence in high-risk areas.

The insurance industry under siege

The rise in weather-related catastrophes is placing increasing strain on insurers’ bottom lines and capital reserves. Compounding this issue is a structural shift in the reinsurance market. Reinsurers, facing mounting losses, are taking on significantly less risk from these types of events. This leaves primary insurers unable to smooth out losses over time, creating a pressure cooker situation in the industry.

The convergence of inflationary pressures and losses from catastrophic events is pushing policyholders and the industry to a breaking point. To remain sustainable, insurers must reevaluate their approach to risk and pricing.

Richman emphasises that for insurance to remain viable, premiums must reflect the true cost of risk in today’s volatile climate. “Otherwise, you jeopardise the trust placed in the insurance system to be there when things fall apart,” he warns. Price increases may be necessary to maintain the level of coverage policyholders have previously enjoyed, but these adjustments must be implemented in a way that accurately reflects the risk posed by each policy.

Innovative solutions and collective action

While the outlook appears grim, the insurance industry is not standing idle. Sophisticated modelling techniques and innovative solutions are being explored to better quantify and manage rising climate risks. Old Mutual Insure, for instance, has announced a groundbreaking approach to capturing climate change data, including measuring the impact of climate change on flood lines and the proliferation of wildfires, and aligning these with insurance policy experiences. In so doing, it aims to close the gap between predicting and pricing weather-related risks.

However, individual company efforts are not enough. Collective action is imperative to address the growing challenges. Richman calls for increased consumer education on risk management and asset protection against climate change. He also advocates for public-private partnerships to address underinsurance in the South African market and spread risk more equitably.

Looking to successful models abroad, Richman points to the UK’s Flood Re scheme – a joint initiative between the government and insurers to make flood coverage more affordable. He argues that a similar approach could be beneficial in South Africa, where structural deficiencies exacerbate the disparity between the insured and uninsured.

Avoiding California’s fate

To prevent KwaZulu-Natal from becoming truly uninsurable like parts of California, the South African insurance industry must act decisively. Richman believes leveraging novel data sources and AI-enabled analytics is vital to gaining a deeper understanding of climate change risks and incorporating them into the risk models that will assist in securing the sustainability of the industry.

Old Mutual Insure has already partnered with flood science specialists to develop more informed views of flood risks. The company is also using data modelling to simulate the long-term impacts of climate change on insurance results and risk premiums.

Customers and brokers also play crucial roles in mitigating climate change impacts on personal assets. Proper property maintenance and understanding the risks associated with property locations are essential steps in managing exposure.

The path forward

As climate change continues to reshape the risk landscape, the insurance industry faces a critical juncture. The experiences in California serve as a cautionary tale for South Africa, particularly in vulnerable regions like KwaZulu-Natal. By embracing innovation, fostering collaboration between public and private sectors, and promoting consumer awareness, the South African insurance industry is less likely to have to withdraw completely from high-risk areas to remain sustainable, as has been the case in California.

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