Thabiso Rulashe, the head of investor relations and strategy at Santam, says that while the impacts of climate change vary by region/province, according to Greenpeace, the interior of southern Africa is warming at twice the global average rate. “Conversely, the coastal cities have experienced a significant increase in the frequency of flooding,” he said.  

Rulashe pointed out that although flooding in urban areas had been driven by both natural and human factors, the severity of damage had been compounded by structural challenges that amplified the severity of loss events and pushed the cost of insurance into the realms of unaffordability.

“Some examples include poorly maintained road, rail and ports infrastructure and the well-reported shortcomings in municipalities’ water and sanitation infrastructure, to name a few,” he said. 

“The interconnectedness of risks becomes evident when you consider how poorly maintained infrastructure magnifies the potential losses, insured or otherwise, due to climate change-related extreme weather events. 

“For example, neglected stormwater drainage or sluice gates can magnify flood damages; shortages of firefighting equipment, access to water or manpower can delay firefighting responses, leading to total instead of partial losses. To illustrate this cost, the Santam Insurance Barometer Report 2022/23 reported that the economic cost of the April 2022 KwaZulu-Natal floods was estimated at R54-billion, with half that total carried by the insurance industry.”  

Part of the problem is that the unpredictable nature of natural disasters affects the ability of underwriters to effectively measure, predict and price risk. This could lead to premium increases in vulnerable areas, which may impact affordability issues. Rulashe said that in the US, this threat had already become a real issue, with some insurers limiting or pulling cover from fire- and flood-prone areas, leaving homeowners with limited cover options. 

“The vulnerable are likely to be worst affected as increasing losses will likely widen the protection gap. Described as the difference between economic losses and insured losses, the protection gap is a global phenomenon largely impacting emerging economies and the poor in general as most losses in those segments are still uninsured,” he said. 

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Aon reported that the global protection gap was 69%, meaning about $262-billion of economic losses were not covered in 2023. In the Emea region, which SA is part of, the protection gap is 83%. 

In the context of South Africa, the protection gap is further exacerbated by macroeconomic factors such as low growth, rising unemployment and the cost-of-living crisis, to mention a few. These factors continue to place pressure on the consumer, further widening the protection gap. Swiss Re estimates South Africa’s natural catastrophe protection gap to be $0.5-billion (R9.3-billion). 

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Ronald Richman, the chief actuary at Old Mutual Insure, agrees, saying that while South Africa used to be a CAT-free zone, the scale and magnitude at which disasters have taken place recently means we are now experiencing a dramatic shift in the CAT landscape. 

In 2023, Old Mutual Insure recorded 10 weather-related claims events, of which three were significant, running into millions of rands: the Western Cape storms in June and then again on Heritage Day weekend in September, and the Gauteng and Mpumalanga hailstorm in November 2023. 

Global effects of CAT losses 

Richman said data showed that severe convective storms were predominantly responsible for CAT losses, accounting for 68% of global insured natural catastrophe losses in the first half of 2023. Severe thunderstorms in the US led to $34-billion in insured losses, some 70% of total insured CAT losses, during the same period, an unprecedented level of financial damage in such a short time, according to Swiss Re Group’s Sigma publications.

Whereas large single events, such as hurricanes or earthquakes have often been the driver of record CAT losses in previous years, data from 2023 suggest that smaller events were the main issue during 2023. This was also the case in the South African environment. 

Richman said that in addition to the above factors, 2023 was the hottest year on record, with scorching temperatures driven by climate change and further amplified by El Niño, a naturally occurring climate phenomenon that takes place every two to seven years, and other cyclical weather phenomena. 

In 2023, some experts said that the US economy was overexposed to climate risk in the same way that it was overexposed to mortgage risk in 2008, a major cause of the catastrophic financial crisis at the time.

Flooding in and around following heavy winter rains in the Western Cape on 15 June 2023. (Photo: Supplied)

A resident looks at a broken garage door on Beach Road above Bikini beach after waves hit homes in Gordon’s Bay on 17 September 2023. (Photo: Shelley Christians)

“Given this picture, it is not far-fetched to believe that climate change has the potential to destabilise the global insurance industry, with ripple effects for SA,” Richman said. Signs of stress are already emerging in several parts of the US, with companies withdrawing coverage from California and Florida. 

Richman said that structural changes in the reinsurance market had compounded the challenges. 

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“While many of the recent events have not been unprecedented, insurers have experienced them as particularly acute losses hitting their bottom lines and capital reserves. This is due to reinsurers taking significantly less risk from these types of events, leaving insurers unable to smooth out the losses over time.”  

In 2023, according to research undertaken by PwC, reinsurers again ranked climate change as the most significant risk facing the sector. According to Moody’s, reinsurers are feeling the pinch as they accumulate losses from customer-facing insurance companies. To counter this, many are raising prices, limiting coverage, and even exiting some markets to improve returns. 

Gavin Hatherley, general manager of Avalon Springs in Montagu, surveys the damage to the hotel’s recently opened upgraded pool area after devastating weather that tore through the Western Cape in September 2023. (Photo: Shelley Christians)

2023 weather castastrophes in South Africa. (Graphic: Supplied)

“This structural shift in the reinsurance market has far-reaching implications, demanding a fundamental re-evaluation of how the market approaches risk and pricing,” Richman said, emphasising that contrary to popular belief, profit margins in the traditional lines of business in the non-life insurance industry were slim. 

“This, together with the convergence of inflationary pressures and losses from CAT events, means that we are in a pressure pot, ready to bubble over.” 

Innovative approach to monitoring flood risks

Earlier this year, Old Mutual Insure announced an innovative approach to capturing climate change data and aligning this with the insurance policy experience to help close the gap between the prediction and pricing of weather-related risks. It is the first project of its kind in SA to overlay climate data with claims data. The UK-based flood science specialist JBA Risk Management has partnered with South African non-life insurer Old Mutual Insure for the use of its detailed flood maps in SA.

Haydn Marchant, a reinsurance specialist at JBA Risk Management, said: “We are delighted to be working with Old Mutual Insure to help it understand and manage its flood risk in South Africa. Informed decision-making around floods is critical in building future resilience for both the insurance market and its customers.” DM