Focus: South African catastrophes, power woes signal end of cheap insurance
30/03/2023 06:00
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South Africa long considered a low-risk market
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Pandemic, riots, floods have battered country in recent
years
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Prospect of a power grid failure is adding to risk
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Reinsurers, insurance companies raising rates, curtailing
cover
By Tannur Anders and Promit Mukherjee
JOHANNESBURG, March 30 (Reuters) - Three major jolts in
as many years coupled with the once unthinkable possibility of a
power grid collapse have spooked reinsurers in South Africa,
spelling an end to cheap coverage in the continent's most
developed insurance market.
Insurance premiums are climbing worldwide on the back of
rising inflation and interest rate hikes. But reinsurance rates
in South Africa are outstripping the global trend - in some
cases tripling - as insurers grapple with an unprecedented
claims load, six industry executives told Reuters.
That's largely down to heavy payouts for business
interruption claims in the first year of the pandemic, damage
and looting during 2021 riots and heavy flooding last year.
"From a reinsurance perspective, we've had the three biggest
catastrophe events that this market has ever had in terms of
insured losses," said Andy Tennick, managing director of Africa
Reinsurance Corporation's South African subsidiary.
Reinsurance firms cover insurance companies against
major catastrophic events that would otherwise overwhelm them,
allowing them to manage risk and reduce the capital they must
hold for payouts. As reinsurance rates go up, insurance firms
tend to pass hikes onto their customers.
That's now helping add higher insurance premiums to the
growing list of woes South Africans are already struggling with
and could leave many exposed to heavy losses in the event of a
power grid failure as reinsurers curtail coverage.
South Africa's relatively wealthy, developed economy and
nearly three decades of political stability helped drive
industry growth and draw in reinsurers.
The country's seeming insulation from natural disasters like
tropical storms and earthquakes, meanwhile, made its risk
profile more attractive than Australia, Japan and parts of North
America and Europe.
At the onset of the pandemic, South Africa accounted for
over 70% of Africa's $68 billion in gross written insurance
premiums, according to a 2020 study by business consultancy
McKinsey & Company.
It ranked fifth in the world in terms of total premiums as a
percentage of gross domestic product.
Then came COVID-19 and a tidal wave of business interruption
claims as government restrictions forced many companies to
temporarily close shop.
Politically fueled riots and looting in 2021 caused some
$3.2 billion in damage by one estimate. And insurers worry that
one of the world's highest unemployment rates - over 43% of 15
to 34-year-olds are out of work - is making such unrest a
systematic risk.
Floods, meanwhile, devastated KwaZulu-Natal province in the
country's east last year. South Africa's total economic losses
from natural catastrophes hit $3.5 billion in 2022, according to
Swiss Re Institute, the research arm of Swiss Re SRENH.S , one
of the world's biggest reinsurers.
About $1.4 billion of those losses were insured, but years
of soft market conditions and underpriced risk left insurers
swamped and reinsurers on the hook.
"The reinsurance market has carried the bulk of the insured
losses," said Priyen Mehta, market head for Swiss Re's property
and casualty reinsurance business in Southern Africa.
HIGHER PREMIUMS, LESS COVER
As a result of these repeated hits, big reinsurers are
missing their South African targets for return on equity - a
measure of a firm's efficiency in generating profit. And they
are now tightening the conditions of their agreements with
insurance companies.
"Large industry losses in recent years ... have accelerated
the need for insurance and reinsurance terms and conditions to
return to global levels," Mehta said.
Though five reinsurers contacted by Reuters declined to
share data on how South Africa's rapidly shifting risk profile
has impacted their business, two insurance companies and a bank
with an insurance arm said they are curtailing coverage and
raising rates.
Garth Napier, managing director of Old Mutual Insure, the
general insurance arm of Old Mutual Ltd OMUJ.J , told Reuters
that rates for its catastrophe programmes with reinsurers have
increased up to 60% in the past three years.
Reinsurers are also pushing insurance companies to include
so-called "named perils" in policies rather than offering
blanket cover for catastrophes.
Paul Hanratty, chief executive of Sanlam Ltd SLMJ.J , among
South Africa's biggest insurers, told Reuters he'd seen a
two-to-three fold jump in reinsurance premiums in just the past
five years.
"Which is staggering to think about," he said, adding that
the knock-on effect for consumers was two-fold as reinsurers are
not only increasing rates but also scaling back on events they
cover.
"So the cover has reduced, and the premium has gone up.
Now you are paying 30% to 40% more for much less cover."
GRID FAILURE
There's one particular peril on everyone's mind.
Decades of neglect have crippled state power utility Eskom,
necessitating daily hours-long planned power cuts.
Experts warn the power grid - once the cornerstone of
Africa's most advanced economy - is now at risk of collapse as
Eskom's ageing fleet of constantly breaking coal-fired power
plants fails to meet rising demand for electricity.
Grid failure would plunge South Africa into a nationwide
blackout that could last weeks.
Insurance companies and their reinsurer underwriters worry
the dire and wide-ranging consequences for business operations
and basic services of such an event would set off a deluge of
claims, Africa Re's Tennick said.
Some insurers, either on their own initiative or at the
urging of reinsurers, are already notifying clients that their
policies will not cover grid failure, insurance executives
confirmed.
But one reinsurer emphasised that the picture is much more
nuanced and insurers will still be exposed to the risk.
Were a prolonged blackout to spark large-scale civil unrest,
for example, insurers would likely still have to honour claims
related to looting and destruction of property.
Insurance cover is intended to protect against losses from
isolated, unexpected events, Tennick said.
"But if everybody is going to suffer that loss because the
utility collapses, we can't afford that."
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Economic and insured losses of some major countries https://tmsnrt.rs/40LkC1L
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(Reporting by Tannur Anders and Promit Mukherjee
Editing by Joe Bavier)
((Tannur.Anders@thomsonreuters.com;))