While Santam notified clients of the changes late last year, Hollard followed suit this week as the country went into its second consecutive month of daily rolling blackouts.

Warwick Bloom, spokesperson for Hollard Insurance, clarifies: “Reinsurers participating in South African treaties have given local insurance companies notice that they will not be providing support for losses in the event of a collapse or failure of the national electricity grid.”

A reinsurer is the company that insures an insurer. So, in the event of a massive claims experience, as with the looting and floods of last year, insurers would pay out their clients’ claims and then, in turn, claim from their reinsurer.

Bloom says that while load shedding (implemented to lower the possibility of grid collapse) remains covered to the extent stipulated in existing policy wording and reinsurance treaties, the collapse of the grid is something that has not been previously contemplated to any great extent.

“Along with a number of South African insurers forced into similar action, Hollard has decided to specifically exclude cover for any losses arising from the collapse of the grid,” he says.

‘Uninsurable event’

A Hollard letter sent out this week to policyholders states that “as the sustainability of the industry is paramount, a decision has been made to exclude any loss or damage arising from electricity grid failure from your policy as this is now deemed an uninsurable event.

“This exclusion includes damage from power surges occurring as a result of recovery from grid failure, as well as any resultant damages.”

The exclusion will kick in from 1 April and policyholders are referred to a 58-page “quick reference guide”.

Further digging calls up a reference to national grid failure on page 20. Hollard says, “We do not cover loss, damage, any amount of any kind, or liability that is caused (in any way) by electricity grid failure.”

Electricity grid failure is defined as “an interruption to or suspension of electricity supply, in any manner and from any source, and for any reason (including damage and any inability and/or failure on the part of the supplier) which affects an entire municipality (including local, district, regional or any other level that is created by law) or province or the country at substantially the same time, including any interruption, power surge or suspension at the reconnection or reinstatement of electricity supply”.

This means that the exclusion does not only apply to a national grid failure, but could include a grid failure confined to a single municipality. 

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Policyholders are also warned that the exclusion includes consequential losses such as the disruption of water, telecommunications and sewage systems, and the deterioration of food.

Load shedding is, however, covered and is defined as “the intentional, total or partial, withholding of electricity supply (from any source) by any party other than the insured, implemented in phases, which do not affect a municipality (including local, district, regional or any other level that is created by law) or province or the country at substantially the same time”.

Chris Yelland, an energy analyst and managing director of EE Business Intelligence, says a general electricity shortage – such as the country is experiencing now – is not the normal cause of a blackout or grid failure. 

“Implementing levels of load shedding is a slow process where the power utility spots a difference in supply and demand and implements staged load shedding to reduce demand until there is a balance again. 

Sudden generation loss

“A grid failure would mean a sudden loss in the generation of electricity that happens too quickly for any manual intervention,” he says.

Bloom says Hollard’s decision follows lengthy discussions with reinsurers, regulators and the National Treasury, which concluded that the widespread systemic consequences of a national electricity grid failure cannot be sustainably insured.

However, the insurer has noted a significant increase in claims related to damage caused by power surges and claims for deteriorating foodstuff caused by prolonged outages of residential refrigeration equipment, as well as other claims caused by the knock-on effects of load shedding. 

“While grid failure remains unlikely, it is unfortunately now a possibility, and reinsurers have indicated that they will not provide reinsurance cover in this eventuality. This means that electricity grid failure (as defined in our letter to our clients) is an uninsurable event,” he says.

Attie Blaauw, head of personal lines underwriting at Santam, says load shedding or blackouts are not an insurable risk under an insurance contract. 

“However, (we) do offer cover for damage to sensitive electronic items that is caused by power surges. Power surges and dips happen because of load shedding, leading to damage to electrical and electronic equipment in your home,” he says.

Claims surge

Santam saw a 60% increase in claims for damage to sensitive electronic items due to power surges, across personal and commercial insurance portfolios in the first half of the current financial year. 

In November last year, Santam told policyholders that although it does cover accidental spoiling of food in fridges or freezers, caused by a change in temperature, it does not cover actual damage to fridges and freezers, food spoilt after someone adjusted the temperature control; spoiling due to load shedding or electric grid failure, or spoiling as a result of non-payment or non-purchase of power or any type of fuel.

As with Hollard, these exclusions kick in from 1 April this year and were introduced from 1 January for new policyholders. As per insurance policy contracts, insurers can change terms and conditions of a policy provided they implement a 31-day notice period.

Ernest North, co-founder of fintech insurer Naked, says the main question is whether insurers can afford to cover damage from a significant surge after an extreme scenario such as an overall grid failure. 

“Since many reinsurers have indicated that they will not provide reinsurance cover in this eventuality, it seems this may in fact be an uninsurable event that is likely to be excluded by all insurers in the future.” BM/DM