Insuring risk is not a modern concept. The practice became a routine business security instrument for the burgeoning English shipping industry in the 17th century and the first insurance “contracts” can be traced back to Babylonian times, about 133AD. The field has evolved and withstood centuries of risks. Just as steps needed to be taken to address rapid urbanisation and international trade in the 1600s and 1700s, the industry is again facing an escalating risk landscape.
Climate change, infrastructure concerns and socioeconomic challenges have created a tough environment for local insurers, who have a responsibility to ensure their businesses are strong and able to sustainably withstand the cost of risks dominating the environment, as well as protect the financial wellbeing of clients and keep communities safe.
The past three years have shown that South African insurers are no longer insulated against the large-catastrophe experiences of the Asia-Pacific region, Europe and the US. Globally, the 2020 pandemic rewrote the record books on insurer and reinsurer exposures to systemic risks. Locally, rioting and looting caused an estimated R50bn in economic losses in July 2021, with losses in the April 2022 KwaZulu-Natal floods estimated at R54bn. Half of that was carried by the insurance industry. Extreme weather events also dominated the field's claim statistics in 2022 and 2023.
The growing number of large-catastrophe reinsurance claims locally, with rising global losses, has caused reinsurance premiums to increase significantly. This volatility in the market is likely to become the “new normal”.
Entering 2023, Santam added global geopolitical developments to its monitoring agenda, with a focus on determining how Brics expansion, China-US trade relations and the Russia-Ukraine war will affect the global reinsurance market. More recently, the resurgence of conflict in the Middle East has become a focus.
Another key area contributing to the increased volume of catastrophe claims globally is climate change. Changing weather patterns are evidenced by the number of fires, storms, floods and volume of rain, such as last year's KZN floods and, more recently, those in the Western Cape.
To address the risks posed by escalating climate shifts, we have aligned our approach with global standards, such as the recommendations set out by the Task Force on Climate-related Disclosures (TCFD), and are conducting climate risk assessments to guide our climate change response. An example is the adoption of geocoding technology to better understand our weather-related risk exposure by creating a risk-based view of property locations in South Africa. Climate-related data is mapped with co-ordinates to identify areas that have increased exposure to climate change. These are then managed accordingly through underwriting and pricing actions.
Additionally, attritional weather losses — weather-related claims not associated with a catastrophic event — also threaten the sustainability of the insurance industry. According to the 2022/2023 Santam Insurance Barometer Report, the insurer experienced a spike in flood-related claims across all lines of business in 2022, with the trend continuing into the first half of 2023, when flooding occurred along the Orange and Vaal rivers, followed by that which occurred in the Western Cape about June.
These events revealed an additional layer of risk in that South Africa’s infrastructure degradation increases the extent and severity of flood-related losses. This is a major challenge that will have severe consequences for insurers and the businesses and communities that rely on them.
Worsening road conditions, firefighting capabilities, sewerage systems and floodwater drainage, to name a few, are becoming increasingly vulnerable to disasters. Damage after disasters is extensive, the cost of repairs exorbitant and downtime lengthy. Most importantly, infrastructure that is not sound increases the number of lives that are lost in a disaster. To ensure sustained insurability, significant focus and financial resources from the government, as well as collaboration between the private and public sectors, are required to turn things around.
An example of this collaboration is our Partnership for Risk and Resilience (P4RR) programme, with which we assist municipalities with firefighting, flood defence and other risk-mitigation efforts. The aim is to work together towards proactive risk-management outcomes within municipalities countrywide.
In addition to increasing infrastructure degradation, load-shedding also poses a major risk to consumers and businesses, including the insurance industry. In the 2022 financial year, we experienced a claims increase of about 67% (compared with 2021) for damage to sensitive electronic items because of power surges across our personal and commercial insurance portfolios, totalling R609m.
Though there is a strong correlation between the number of load-shedding events and the frequency of these claim types, we still believe load-shedding, as it pertains to power surge cover, is insurable via a combination of cover exclusions, higher excesses and a “repair rather than replace” policy for certain claims.
From a socioeconomic perspective, the steady increase in crime has become a systemic risk we are tracking closely. According to the 2022/2023 Santam Insurance Barometer Report, South Africa is seeing a big shift in vehicle crime, with Santam’s commercial and personal claims experience confirming a significant jump in high-value vehicle hijackings and thefts. Through our ongoing tracking of emerging risk trends, we were able to implement corrective actions to ensure these vehicles remain insurable.
Additionally, the report found that a growing number of industry stakeholders believe cybercrime to be the next potential black-swan loss event for the insurance industry, with a 12% increase in commercial and corporate respondents citing it as a top risk compared with the 2020/21 report. Despite this, there seems to be an inertia in risk mitigation and risk transfer efforts in this space. The challenge for insurers and insurance brokers is to offer more hands-on assistance to businesses at the underwriting and claim stages.
The current high-risk environment presents many challenges for insurers, who must prioritise ensuring they can sustainably carry these risks so more people can prosper. A thriving insurance sector is a critical cog in a healthy economy as insurance empowers individuals and businesses with the freedom to be more resilient. It is therefore vital that we understand and respond to traditional and emerging risks in an increasingly complex risk landscape.
*Madzinga is Santam Group CEO
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