As the South African insurance industry grapples with the challenges of climate change, crime, inflation, and infrastructure failures, innovative solutions are required. Here, a look at flood insurance in the wake of the 2022 KZN floods.
Climate change, crime, inflation, and infrastructure failures are at the forefront of the sustainability challenges confronting South Africa’s major intermediated insurance brands. As these constraints impact the profitability of insurers and reinsurers, the focus on risk management and the role of intermediated distribution channels has intensified. Flood insurance faces unique challenges and opportunities in this evolving landscape.
Future of general insurance decision making
During this year’s InsureTalk 40 event, insights were shared on the future of decision-making in general insurance. The discussions highlighted the unpredictable nature of climate change and its significant impact on the industry. With the frequency and severity of extreme weather events on the rise, there is increasing pressure on domestic underwriting results.
The availability and affordability of reinsurance coverage have also shifted significantly, with recent years proving difficult for renewals. This shift means local insurers must increasingly handle the damage claims from major events, such as the hailstorm in Gauteng in November 2023, which although localised, caused huge damage. This new reality necessitates a re-evaluation of traditional business models and strategies. Insurers are grappling with whether extreme weather risks can still be priced on annual timeframes or if a longer-term perspective is needed.
Impact of recent floods
The insurance market in South Africa has been significantly impacted by flood damage, particularly following the devastating floods in KwaZulu-Natal (KZN). The South African Insurance Association (Saia) estimated that insurance claims from the KZN floods would exceed R1 billion. This event, considered one of the worst natural disasters in South Africa, caused extensive damage to infrastructure.
The insurance industry faced a surge in claims after the KZN flash floods, with the cost of rebuilding and repairing infrastructure estimated at R12 billion. The combined impact of the July 2021 unrest and the 2022 KZN flood losses resulted in an estimated R54 billion, with half of that total being carried by the insurance industry.
These events underscore the increasing challenges the insurance market faces due to changing weather patterns and climate change, leading to a significant rise in weather-related losses. Insurers have seen an overall market increase of about 15% to 20% for policyholders who have had large claims, with premium increases driven by factors such as inflation on repair costs and weather-related events.
Delivering sustainable underwriting
Sustainable underwriting in the face of climate change-related perils – drought, earthquake, flood, severe convective storms (SCS), and tropical cyclones – is crucial. A report by Gallagher Re noted the direct economic cost from climate-related events in the previous year was USD $357 billion, a staggering figure that reflects the frequency and severity of claims.
Ignoring earthquakes, SCS events have contributed the most to total global economic losses from natural catastrophes. These figures, while not significant on a global scale, pose substantial challenges to South Africa’s relatively small insurance sector.
One innovative approach involves refining geolocated flood data and utilising advanced flood risk modelling. This enables an insurer to map flood risk exposures with precision, providing street-level data on insured properties and their vulnerability to 10-, 20-, and 50-year flood events. Such detailed data, combined with clear underwriting principles, is essential for the sustainability of the industry.
Insurers cannot manage climate burden alone
The insurance industry cannot bear the burden of climate change alone. The rising frequency and severity of extreme weather events necessitate collaboration between the private and public sectors. Insurers, increasingly, are unwilling to take on unsustainable risks, mirroring trends seen in the US where insurers are withdrawing from wildfire-prone areas.
Risk-based insurance pricing is one strategy to mitigate climate-related risks. Advanced flood modelling capabilities allow insurers to price properties based on unique flood risks, even within the same neighbourhood. Insureds and their brokers will also need to play a more active role in reducing risk exposures, potentially employing innovative technologies such as flood defences.
Exposure management is becoming a critical focus, involving detailed discussions between insurers’ underwriting officers and reinsurers about geolocated risk exposures and new underwriting approaches. For example, underwriting decisions for a suburb with multiple severe risks will differ significantly from those for areas with fewer risks.
Collapsing infrastructure and inflation complicate matters
South Africa’s infrastructure challenges and inflation further complicate the insurance landscape. Poorly maintained infrastructure leads to more claims, making insurance difficult to offer. Emerging motor vehicle crime trends also necessitate new risk mitigation requirements for vehicle owners.
Agile, broad-based, real-time underwriting
To ensure long-term sustainability, reinsurers may introduce limits, excesses, and exclusions. Insurers will need to innovate their products to increase insurance penetration and manage risk exposures through geo-located risk ratings. Sharing risks between insurers and insureds is essential, with insurance brokers playing a crucial role in encouraging clients to take ownership of their risks. As climate change increases risk concentrations, agile underwriting will become the norm, ensuring the industry can adapt to these dynamic challenges.
Insurance providers in South Africa must navigate the interplay of climate change, crime, inflation, and infrastructure failures. By embracing advanced data modelling, fostering collaboration across sectors, and innovating their products and pricing strategies, insurers can enhance their resilience and sustainability in the face of these formidable challenges.
