Finance

South Africa heading towards a serious insurance disaster

The lack of investment in maintaining and upgrading South Africa’s infrastructure has made the country highly vulnerable to extreme weather events and the resulting financial losses. 

This poses a particular challenge for insurers, who have direct and indirect exposure to infrastructure failures. 

For example, at the direct level, they insure dams and power stations. The indirect impact arises from higher losses and damage to insured assets due to failing or poorly maintained infrastructure. 

The rise in extreme weather events, their increasing severity, and the associated financial losses will prompt insurers to raise the cost of coverage in vulnerable areas and potentially withdraw coverage completely in some cases. 

This is feedback from Michael Cheng, the Chief Underwriting Officer at Santam, who outlined the impact of South Africa’s deteriorating infrastructure on individuals and insurers. 

Cheng explained that while infrastructure failure does not feature in global lists of the top ten risks for companies and individuals, it is in the top five locally. 

Domestic extreme weather-related losses were less severe in 2023 and 2024, with a similar number of events occurring in both years. 

However, the total claims from events exceeding R100 million per event increased in 2024, with these events occurring across wide geographic areas. 

Cheng said that, in particular, the continued encroachment of commercial, industrial and housing developments on 50-year flood lines remains a major challenge for insurers. 

He explained that there is an interesting parallel between local floods and LA wildfires. In the US, the spread of the LA wildfires was worsened by insufficient firefighting funding, ageing infrastructure and flammable housing. 

In South Africa, the impact of the KZN floods was exacerbated by poor urban planning, inadequate infrastructure, and insufficient stormwater drainage maintenance. 

This shows that losses arising from systemic risks such as natural catastrophe and weather volatility are amplified by inadequate or poorly maintained infrastructure. 

Inadequate or poorly maintained infrastructure was a top-three concern among commercial survey respondents. 

Almost two-thirds stated that failing infrastructure posed a significant risk to their businesses overall, and 83% identified poor infrastructure as the primary emerging risk to their businesses over the next two years. 

Businesses and households flagged various infrastructure issues spanning deteriorating road and rail infrastructure, interrupted water supply, and the well-documented issues across the national electricity grid. 

This is particularly concerning in areas where risk is poorly understood or where failing infrastructure amplifies the impact of extreme weather, insurance coverage becomes increasingly difficult to price and provide. 

This is particularly concerning as urban development continues in flood-prone or inadequately serviced areas. 

Santam has witnessed first-hand the ongoing expansion of building activity into high-risk areas, such as floodplains in Ladysmith and St Francis Bay and dolomitic zones like Centurion.

For example, in the 2022 KZN floods, several landslides occurred during heavy rainfall, contributing to significant downstream flooding and property damage.

Additionally, if the canals and waterways had been fully functioning, the industrial areas around the Durban port would likely have suffered a smaller impact.

South Africa’s insurance crisis

Cheng explained that the rise of extreme weather events has made them a systemic risk to insurers, with the potential to destabilise the local industry.  

Systemic risks are those with the potential to trigger widespread losses across multiple business sectors or geographic regions, threatening the functioning of the economy and the stability of the insurance industry. 

Extreme weather events are increasingly classed as systemic risks as their frequency and severity increase over time. 

Deteriorating infrastructure in South Africa exacerbates the impact of such events, presenting a unique challenge to local insurers and pushing global reinsurers to raise their price of coverage in the country. 

Aon’s 2025 Climate and Catastrophe Insight puts the total economic losses caused by natural catastrophe events in 2024 at $368 billion, of which $145 billion was covered by insurers and reinsurers. 

Similarly, Gallagher Re’s Natural Catastrophe and Climate Report 2024 noted that the annual average loss from natural catastrophes from 2017 to 2024 had cost insurers $146 billion, suggesting a ‘new normal’ for catastrophe losses approaching $150 billion annually.

This is reflected locally, with several weather events in the past five years producing claims worth billions and significantly impacting the economy.

Insurers have direct and indirect exposures to infrastructure shortcomings. For example, at the direct level, they insure dams and power stations. 

At the same time, the indirect impact arises from higher losses and damage to insured assets due to failing or poorly maintained infrastructure. 

The 2022 KwaZulu-Natal floods remain the country’s costliest insured event, with claims totalling just over R15 billion and an estimated total economic impact of R54 billion. 

This highlights the persistent gap between insurable losses and overall economic losses, which poses a major threat to the local economy.

It also poses a significant threat to the stability of the local financial system, the Reserve Bank revealed in its latest Financial Stability Review.

The Reserve Bank explained that the most concerning impact of climate change is the significant insurance gap, created by insurers’ need to increase premiums to match the rising cost of coverage and the increasing cost of reinsurance.

It said this is a growing area of focus, as it has the potential to significantly impact South Africa’s financial system due to its global exposure.

The insurance gap refers to the portion of economic losses arising from climate-related shocks that remains uninsured, and it is expected to widen as the risks associated with climate change intensify.

A related issue is the growing issue of uninsurable risks, which are risks that insurance companies explicitly exclude from available insurance coverage.

This is predominantly due to the rising cost of coverage in areas plagued by extreme weather, making it economically unviable for insurers to offer traditional products.

It is also driven by the rising cost of reinsurance, with reinsurers being unwilling to take on the risk associated with specific events.

With the increased frequency of extreme weather events, insurers are unable to lean on reinsurers to smooth out the impact over time.

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