Three major jolts in as many years coupled with the once unthinkable possibility of a power grid collapse have spooked reinsurers in South Africa, spelling an end to cheap coverage.

Insurance premiums are climbing worldwide on the back of rising inflation and interest rate hikes. But reinsurance rates in South Africa are outstripping the global trend — in some cases tripling — as insurers grapple with an unprecedented claims load, six industry executives said.

That’s largely down to heavy payouts for business interruption claims in the first year of the pandemic, damage and looting during 2021 riots and heavy flooding last year.

“From a reinsurance perspective, we’ve had the three biggest catastrophe events that this market has ever had in terms of insured losses,” said Andy Tennick, MD of Africa Reinsurance Corporation’s South African subsidiary.

Reinsurance firms cover insurance companies against major catastrophic events that would otherwise overwhelm them, allowing them to manage risk and reduce the capital they must hold for payouts. As reinsurance rates go up, insurance firms tend to pass hikes onto their customers.

That’s now helping add higher insurance premiums to the growing list of woes South Africans are already struggling with and could leave many exposed to heavy losses in the event of a power grid failure as reinsurers curtail coverage.

Risk profile

South Africa’s relatively wealthy, developed economy and nearly three decades of political stability helped drive industry growth and draw in reinsurers. The country’s seeming insulation from natural disasters like tropical storms and earthquakes, meanwhile, made its risk profile more attractive than Australia, Japan and parts of North America and Europe.

At the onset of the pandemic, South Africa accounted for over 70% of Africa’s US$68-billion in gross written insurance premiums, according to a 2020 study by business consultancy McKinsey & Company. It ranked fifth in the world in terms of total premiums as a percentage of GDP.

Then came Covid-19 and a tidal wave of business interruption claims as government restrictions forced many companies to temporarily close shop. Politically fuelled riots and looting in 2021 caused some R58-billion in damage by one estimate. And insurers worry that one of the world’s highest unemployment rates — over 43% of 15- to 34-year-olds are out of work — is making such unrest a systematic risk.

Floods, meanwhile, devastated KwaZulu-Natal last year. South Africa’s total economic losses from natural catastrophes hit R63-billion in 2022, according to Swiss Re Institute, the research arm of Swiss Re, one of the world’s biggest reinsurers. About R25-billion of those losses were insured, but years of soft market conditions and underpriced risk left insurers swamped and reinsurers on the hook.

“The reinsurance market has carried the bulk of the insured losses,” said Priyen Mehta, market head for Swiss Re’s property and casualty reinsurance business in Southern Africa.

As a result of these repeated hits, big reinsurers are missing their South African targets for return on equity — a measure of a firm’s efficiency in generating profit. And they are now tightening the conditions of their agreements with insurance companies.

“Large industry losses in recent years … have accelerated the need for insurance and reinsurance terms and conditions to return to global levels,” Mehta said.

Though five reinsurers contacted for this article declined to share data on how South Africa’s rapidly shifting risk profile has impacted their business, two insurance companies and a bank with an insurance arm said they are curtailing coverage and raising rates.

Garth Napier, MD of Old Mutual Insure, the general insurance arm of Old Mutual, said rates for its catastrophe programmes with reinsurers have increased up to 60% in the past three years. Reinsurers are also pushing insurance companies to include so-called “named perils” in policies rather than offering blanket cover for catastrophes.

Paul Hanratty, chief executive of Sanlam, among South Africa’s biggest insurers, said he’d seen a two- to three-fold jump in reinsurance premiums in just the past five years. “Which is staggering to think about,” he said, adding that the knock-on effect for consumers was two-fold as reinsurers are not only increasing rates but also scaling back on events they cover. “So, the cover has reduced, and the premium has gone up. Now you are paying 30-40% more for much less cover.”

Were a prolonged blackout to spark large-scale civil unrest, insurers would likely still have to honour claims

There’s one particular peril on everyone’s mind. Decades of neglect have crippled Eskom, necessitating daily hours-long planned power cuts. Experts warn the power grid — once the cornerstone of Africa’s most advanced economy — is now at risk of collapse as Eskom’s ageing fleet of constantly breaking coal-fired power plants fails to meet rising demand for electricity. Grid failure would plunge South Africa into a nationwide blackout that could last weeks.

Insurance companies and their reinsurer underwriters worry the dire and wide-ranging consequences for business operations and basic services of such an event would set off a deluge of claims, Africa Re’s Tennick said. Some insurers, either on their own initiative or at the urging of reinsurers, are already notifying clients that their policies will not cover grid failure, insurance executives confirmed.

But one reinsurer emphasised that the picture is much more nuanced, and insurers will still be exposed to the risk. Were a prolonged blackout to spark large-scale civil unrest, for example, insurers would likely still have to honour claims related to looting and destruction of property. Insurance cover is intended to protect against losses from isolated, unexpected events, Tennick said. “But if everybody is going to suffer that loss because the utility collapses, we can’t afford that.” — Tannur Anders and Promit Mukherjee, (c) 2023 Reuters