South African insurance warning


South Africans are at risk of being left uninsured against particular risks, ranging from inconsistent power supply to extreme weather events as the country’s insurance gap widens. 

The insurance gap is generally defined as the difference between the insurance need and actual cover. 

The Prudential Authority warned that this gap is at risk of widening due to increasing reinsurance costs faced by local insurers and an uptick in claims, which are pushing insurance companies to reduce their coverage. 

For example, insurers and reinsurers imposed strict restrictions and limitations on property damage losses due to ongoing power supply disruptions in 2022 and 2023. 

This included the effects of load-shedding, such as business interruption losses, power surge cover and the potential risk of a national grid failure.

Grid failure was also deemed a systemic risk and was therefore explicitly excluded as a valid loss event by many insurers, reinsurers and Sasria. 

These exclusions created an insurance gap in the market, which is yet to be closed, the Prudential Authority’s annual report said. 

This is because the power supply remains inconsistent despite the fact that there is a sufficient supply to meet demand due to local infrastructure failing under increased load. 

Another risk the regulator noted is the rise in extreme weather events, with it conducting a series of meetings with insurers to assess their readiness. 

Damages to property and infrastructure, owing to more frequent floods and wildfires, are having a significant impact on insurance claims, including additional costs for the national fiscus. 

This has led to insurers debating their coverage of such damages and increasing reinsurance costs that push them to increase the price of premiums. 

“Reinsurance markets are hardening in capacity and pricing, leading to more natural catastrophe cover restrictions and higher retention limits for insurers,” the report said.  

“The restrictions have the potential to create an insurance gap where certain perils will be uninsured.” 

Although the sector remained resilient and profitable, the claims to costs ratio continued to experience added pressure as motor vehicle claims resumed to prepandemic levels. 

Inflation and unfavourable exchange rates have also negatively impacted (exacerbated) the cost of motor vehicle parts, thus further straining the loss ratio. 

The deteriorating road infrastructure further contributed to increased claims costs to non-life insurers. 

CEO of the Prudential Authority, Nomfundo Tshazibana

The Prudential Authority warned that it is unclear whether the insurance industry can weather this storm as data availability, reliability, and quality remain major challenges. 

Other challenges include a lack of expertise and skills in scenario analysis and climate-risk modelling, and long-term scenarios can be challenging to interpret. 

This, together with the lack of industry guidance and standardised methodologies, makes it difficult to assess the financial impact of climate change fully and increased extreme weather events. 

To address this, the regulatory has created a Task Force on Climate-related Financial Disclosures (TFCFD) to increase the quantity and reliability of data from affected financial institutions. 

It warned that the effect of extreme weather and the transition to a low-carbon economy on financial assets is unknown. 

Banks may experience increased credit risk due to a reduced pool of eligible collateral, while declining property values may significantly impact wealth creation. 

For households and firms, a lack of product offerings and/or higher premiums hinder post-disaster construction financing in the form of lower productivity and output, negatively impacting GDP. 

Governments may face increased debt burdens, placing additional pressure on the fiscus and potentially exerting upward pressure on bond yields, impacting banks and insurers as sovereign investors. 

“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 Old Mutual’s chief actuary Ronald 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,” said Richman.

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


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