S&P Global Ratings has indicated that it is too soon to fully determine the financial and ratings impact on South Africa's insurance sector following last week's extreme weather events in the southern and eastern regions.
Since June 1, heavy rainfall and floods in parts of the Eastern Cape, along with tornadoes in KwaZulu-Natal (KZN), have resulted in loss of life and significant damage to homes, vehicles, and public infrastructure, including schools, roads, and healthcare facilities.
S&P noted that negative rating actions are unlikely at this time, particularly where insurers have robust capital and liquidity buffers to absorb potential related claims. "However, we expect downward pressure on earnings for the industry if the trend persists."
The capital and liquidity buffers of insurance companies may also weaken in the longer run if weather-related claims coincide with challenging economic conditions, high inflation, and high unemployment in South Africa, it said.
The credit rating specialist said it will continue to monitor the developments in the second half of the year, particularly as the La Niña switch is expected to fuel extreme weather in the later part of this year.
It noted that the country has experienced an increase in weather-related events like floods, wildfires, and storms over the past two or three years.
As a result, there has been a substantial increase in reinsurance costs and deductible levels for primary insurers.
Primary insurers slightly decreased their reinsurance utilisation in 2023, to about 30% reinsurance to gross premium written, from 32% in 2022.
And, according to the South African Reserve Bank, the average combined ratio for primary insurers increased to 100.6% as of Dec. 31, 2023, from 98.2% in 2022. Some primary insurers have responded by adjusting premiums upwards.
They are also focusing on geocoding to determine risks in certain areas and price accordingly. "This will likely lead to a greater selection of risks and better pricing and may limit the impact of high-frequency weather-related events on underwriting profits going forward," S&P said.
Santam, meanwhile, said it received more than 250 claims for damage to property and other assets caused by severe weather in parts of the Eastern Cape.
Weather-related insurance claims are rising in South Africa, a trend expected to worsen due to global warming.
Ronald Richman, chief actuary at Old Mutual Insure, warned that weather events threaten an insurance crisis, with South African insurers bracing for impact.
Historically a CAT-free zone, the country has seen a dramatic shift, with 10 weather-related claim events recorded by Old Mutual Insure in 2023, including major storms in the Western Cape and hailstorms in Gauteng and Mpumalanga.
Globally, severe convective storms caused 68% of insured natural catastrophe losses in the first half of last year. 2023 was also the hottest year on record due to climate change and El Niño, which typically causes drier conditions every two to seven years.
Richman suggested that climate change could destabilise the global insurance industry, with ripple effects for South Africa.
In the US, companies are already withdrawing coverage from California and Florida due to climate-related risks.
“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," Richman said.
“This is due to reinsurers taking significantly less risk from these types of events, leaving insurers unable to smooth out the losses over time.”
Insurers face acute losses as reinsurers take on less risk, leaving insurers unable to spread out losses over time.
PwC and Moody's research highlights climate change as the most significant risk for the sector, prompting reinsurers to raise prices, limit coverage, and exit some markets.
Richman said that profit margins in traditional non-life insurance are slim, and the convergence of inflationary pressures and CAT event losses puts the industry under immense pressure. To sustain insurance, prices must reflect the true risk of climate change.
Despite the challenges, new modelling techniques are helping quantify climate risks, and mitigation efforts, including public-private partnerships, can address underinsurance and spread risk more equitably.
Richman cited the UK's Flood Re scheme as a model for South Africa, suggesting a similar approach to bridge the gap between insured and uninsured populations.
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