South African insurance crisis warning

South Africa’s insurance industry is facing a potential crisis with a rise in climate-related claims forcing insurers to raise prices due to more expensive reinsurance costs. 

This is feedback from the chief actuary at Old Mutual Insure, Ronald Richman, who said that globally, weather-related events are threatening to cause an insurance crisis, and local insurers are bracing for its impact.

“While the country used to be a Catastrophic Event (CAT) free zone, the scale and magnitude at which disasters have taken place recently means we are now experiencing a dramatic shift,” said Richman.

In 2023, Old Mutual Insure recorded ten weather-related claims events, of which three were significant, running into millions of rands. 

These were the Western Cape storms in June and then again on Heritage Day weekend in September, as well as the Gauteng and Mpumalanga hailstorms in November 2023.

This is not a phenomenon unique to South Africa. Globally, severe weather is impacting the sustainability of the insurance industry in new and unexpected ways. 

Global data shows 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 caused an unprecedented level of financial damage, with $34 billion in insured losses, some 70% of total insured CAT losses. 

Whereas large single events, such as hurricanes or earthquakes, have often been the driver of record CAT losses in previous years, data from 2023 suggests that smaller events were the main issue during 2023. 

This was also the case in the South African environment.

“Given this picture, it is not far-fetched to believe climate change has the potential to destabilise the global insurance industry, with ripple effects for South Africa,” said Richman.

Signs of stress are already emerging in several parts of the United States, with companies withdrawing coverage from California and Florida.

He says that structural changes in the reinsurance market have compounded the challenges.

“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,” said Richman.

This is compounded by unique risks in South Africa, such as political instability, load-shedding-related claims, and water shortages. 

Thus, local insurers are facing increasing pressure from rising reinsurance costs, forcing them to either hike prices to accommodate the elevated costs or reduce coverage.