Catastrophe events caused an estimated US$135bn in insured losses in 2017 as hurricanes, severe weather and wildfires destroyed property and possessions worldwide. South Africa was no exception as fires in the Western Cape, floods in Gauteng and KwaZulu-Natal, and a massive hailstorm in Gauteng tested local insurers to their limits. Local insurers lived up to their promise by paying out billions of rand to both individual and business policyholders to compensate them for the losses suffered.
The Oxford Dictionary defines ‘catastrophe’ as an event causing great and usually sudden damage or suffering a disaster. “From an insurance point of view, a catastrophe involves multiple claims arising from a single event, or a series of events, occurring over a finite period, usually several days,” says Michael Cheng, Chief Risk and Underwriting Officer for Hollard Insurance. “The event can be man-made (for example, fires or a riot) or natural – think of severe hailstorms, floods, earthquakes and tornadoes.”
Santam, South Africa’s largest short-term insurer, paid out more than R1.4bn in catastrophe claims in 2017, making it the worst experience in the insurer’s 100-year history. Old Mutual Insure estimates the total damages suffered following the Knysna disaster to have amounted to R5bn, while Hollard reports that losses from the October 2017 flooding in KwaZulu-Natal and Gauteng could reach R1.8bn.
“The burden of catastrophes has increased significantly in the last few years – hail dominated the claims landscape in 2015, flooding in 2016 and the Knysna fires in 2017,” says John Melville, Head: Risk Services at Santam. You need some basic insurance knowledge to understand the consequences of frequent catastrophe events, starting with the relationship between an insurer and a reinsurer. “An insurer has risks that it wants to protect against, and will therefore buy ‘insurance’ with a reinsurer to cover those risks,” says Cheng.
“The whole idea of arranging reinsurance is to spread your risk and not expose your own company to possible bankruptcy if a catastrophe happens,” says Johan Welthagen, Head of Claims Support Services at Old Mutual Insure. In other words, reinsurance is insurance for an insurer.
A very basic example of reinsurance in action can be found in Santam’s 2017 Integrated Report. Santam received claims totalling R823m from its policyholders following the Knysna fires, but because it had reinsurance contracts in place, it only had to pay out R174m from its own funds – the balance was paid through Santam by its reinsurer.
But the increase in frequency and size of catastrophe events has forced global reinsurers to reconsider their business arrangements with South African insurers. “We used to have one catastrophe every few years, but in recent times, we have experienced a few events every year,” says Cheng. He explains that events during 2017 have hurt many global reinsurer earnings and expects this may influence the pricing, risk appetite and reinsurance capacity in coming years.
“Large catastrophe losses could require that our reinsurers increase their reinsurance premiums, with a consequent increase in the amount we spend on reinsurance,” agrees Melville. Insurance brokers could face higher renewal premiums on their portfolios, and policyholders could face higher renewal premiums on their policies as a result. “If reinsurers enforce ‘stricter’ reinsurance terms, local insurers are forced to accept a bigger part of the risk for their own account – increasing the financial risk and possibly resulting in higher premiums to policyholders,” adds Welthagen.
Seelan Naidoo, Head of Property and Engineering at Allianz, says both insurers and reinsurers have been forced to revaluate their exposure to catastrophe-type events. “Insurers – and therefore policyholders – were negatively affected by increases in reinsurance pricing from their treaty reinsurers, specifically due to loss activity in 2017. “In some cases, treaty capacity was reduced, directly affecting insurers’ ability to carry on normal business activities,” he says.
Major catastrophes, such as the Knysna fires, have made policyholders more aware of the precautions they can take to reduce losses. “The cost of claims can be reduced if the policyholder maintains their property adequately. Simple actions, such as clearing gutters for rainfall or installing fire protection – such as fire extinguishers or sprinkler systems – for larger commercial risks, can lead to a reduced loss in the case of a catastrophe,” concludes Melville.
But some catastrophes, such as earthquakes, cannot be mitigated against, except perhaps during construction. Many insurance companies send SMS messages to warn policyholders of imminent threats. “We can warn policyholders of impending storms and urge them to take precautionary measures such as avoiding driving in storms, getting indoors for safety and moving vehicles under cover,” says Cheng. Traditional insurers also encourage their brokers to guide policyholders on how to prevent or reduce damage due to insured loss events