Three provinces heading for an insurance crisis

The Eastern Cape, Western Cape, and Free State are the provinces most likely to experience an insurance crisis with these regions being the most heavily impacted by extreme weather events, raising the cost of coverage and may result in no coverage at all. 

South Africa’s insurance industry is coming under increasing pressure from rising reinsurance costs due to the country’s risk profile and the rise in catastrophic weather events. 

The purpose of insurance and reinsurance is to provide protection and pool risk among individuals, companies, and geographies. 

However, this is proving increasingly difficult in South Africa due to more widespread and severe weather events, said PwC Africa insurance leader Alsue du Preez. 

The Reserve Bank has moved to classify climate change a ‘perpetual risk’ due to the risk in catastrophic weather events in South Africa and the risk they pose to financial stability. 

In its latest Financial Stability Review, the bank said insurers have been the hardest hit by the rise in extreme weather events in South Africa. It split climate risk into two key risk types –

• Physical risk refers to the potential financial losses that could be suffered due to extreme weather events caused by climate change.
• Transition risk arises from the movement towards a lower-carbon economy, which would reduce the value of non-qualifying financial asset

The increasing frequency and impact of extreme weather events result in more substantial property damage and, thus, losses for insurance companies, banks and other financial institutions. 

Such events dominated the domestic insurance industry’s claims statistics in 2022 and 2023. 

Insurers have experienced a sharp uptick in climate-related claims in recent years, a dramatic shift from when South Africa was a catastrophic event-free zone. 

The provinces of the Eastern Cape, Western Cape, and Free State are at particular risk from severe weather events. 

These provinces have suffered the most from heavy rains or flooding, severe thunderstorms, and cold-related events and are likely to experience heat stress in the future. 

This is shown in the table below. 

The increasing frequency and severity of weather events are putting insurers under strain. Compensating clients for increasingly costly damage to property and health is, in some cases, becoming unviable, Du Preez said. 

Globally, some insurers have responded to severe climate risks by no longer covering them. So far, local insurers have responded by raising premiums 

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

The Reserve Bank warned that an increase in these types of events could weaken insurers’ solvency positions and hinder their ability to forecast losses in the future.

Chief actuary at Old Mutual Insure, Ronald Richman, said that while South Africa has been free of large, single catastrophic events, there has been a rise in losses from relatively smaller events that are occurring more regularly. 

“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.

“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.”

This is compounded by South Africa’s unique challenges, from deteriorating infrastructure, political instability, water shortages, and inconsistent electricity supply. 

These have raised the cost of reinsurance in the country and will compound the effect of any catastrophic weather event.