Total blackout risk for South Africa’s insurance industry

The possibility of national grid failure could change the insurance landscape significantly, experts warned.

Christelle Colman, CEO and founder of Ami Underwriting Managers, told The Money Show that national grid failure might soon become a risk that is “uninsurable”. 

Insurers may withdraw their existing cover for grid failure because it’s a risk “that’s becoming too frequent and not unforeseen and sudden anymore,” she said.

“The international reinsurance market is very nervous about [national grid failure]. They won’t cover it, so they expect the local insurers to bring in this exclusion.”

A national grid failure exclusion differs from regular load-shedding cover, Colman said. 

Grid failure is a total or partial loss of power on a network, which is caused by grid instability due to the demand for power being higher than the supply.

In South Africa, Eskom’s inability to keep up with demand has been attributed to unexpected breakdowns and scheduled maintenance of power plants. 

Load-shedding has, therefore, been implemented since 2007 as a measure to stabilise the grid and prevent a grid collapse, which would result in a prolonged blackout.

The fear of national grid failure has already manifested in the South African insurance industry.

Insurance giant Hollard recently pulled cover for grid collapse, which includes grid failure on a municipal, provincial, and national level.

Hollard spokesperson Warwick Bloom told Moneyweb, “while grid failure remains unlikely, it is unfortunately now a possibility, and reinsurers have indicated that they will not provide reinsurance cover in this eventuality.” 

“This means that electricity grid failure – as defined in our letter to our clients – is an uninsurable event. Along with other insurers, Hollard is attempting to make this clear for policyholders.”

The country’s largest short-term insurer, Santam, has followed suit and will implement a general electricity grid failure exclusion on all its policies from 1 April 2023.

“The grid failure exclusion has been introduced on the back of unprecedented levels of load shedding and pressure from global reinsurers that require Santam to reduce our exposure to business interruption claims arising from failure of Public Utilities and Public Telecommunications,” Santam said in a statement.

News24 reported that almost all of South Africa’s biggest short-term insurers have included or are in the process of including a similar exception, including OUTsurance and OldMutual.

In a 2021 bulletin, South African Insurance Association CEO Viviene Pearson warned that this would become a problem.

“Given our circumstances as South Africa, the possibility of a prolonged power grid failure is a significant risk that has not escaped our minds and discussions as non-life insurers. Whilst limited insurance cover is available for losses due to sporadic power outages and/or load shedding, grid failure is not an insurable risk,” she said.