A South African Catastrophe Reinsurance Health Check

In the last two years, three major hail storms made news headlines as they ripped through Gauteng. Each hailstorm left extensive destruction in its wake, collectively costing the insurance industry a staggering ZAR2.5billion in losses. While this may sound like an outlandish amount, South Africa’s reinsurance catastrophe models are designed to protect against a Probable Maximum Loss (PML) of up to R30.8billion in the event of a cataclysmic disaster such as an earthquake or a tsunami.

According to Pieter Visser, a Catastrophe Analyst at Aon Benfield, hail storms are not an uncommon occurrence. “They take place across the length and breadth of South Africa on an annual basis but what makes the three events in Gauteng noteworthy is the net retained exposure that the province represents. Gauteng’s built-up area constitutes only 0.5% of SA’s land surface area but due to the fact that the area is densely populated, Gauteng constitutes 35% of the exposure to catastrophic events such as hail storms,” explains Pieter. 

The growth of lower income households in the property market also presents its own challenges in this respect. “Hail damage to a property that is worth R500 000 and one that is worth R2million is virtually the same. The cost of replacing a window or a roof for example equates to the same amount regardless of the property or its location. Even in the motor vehicle insurance market, losses are much higher than in the past due to changing manufacturing methods, increasing costs of vehicle parts and the like,” says Pieter.

What this means, especially for properties that are valued below R1million, is that the catastrophe premium component of their insurance cover is likely to be too low and that insurers will have to relook their pricing methodologies for these exposures. To address the issue, the insurance industry may need to increase rates or implement higher excess payments that are levied in the event of a catastrophe, such as a hail storm.

There are however a few things that can be done to mitigate the risk of hail damage and a good place to start would be to heed weather warnings. “Home maintenance is critical,” says Mandy Barrett of Aon South Africa. “Roof tiles and windows receive the most damage during a hail storm, which makes it important to check the quality of roof tiles and the thickness of window glass to protect against damage and injury. The increasing focus on green technology also means that many households have solar geysers and panels that are greatly at risk during a hail storm due to its structure. It would be wise to check whether these items are included under your homeowners’ insurance cover,” urges Mandy. 

It took a great deal of time for insurers to repair the damage and settle claims in the aftermath of the recent hail storms in Gauteng and it was mostly due to a lack of capacity from suppliers. “For this reason it is advisable to check whether your homeowners’ insurance offers a Home Assistance Service, as it will greatly aid in the completion of emergency repair work that needs to be addressed in order to avoid a bigger problem. These services generally include plumbing, electrical wiring and even the services of a locksmith,” advises Mandy.

Technological advances however abound, enabling the insurance industry to map storm damage by means of geographical information systems with the support of radar data. “Within 24 hours of an event, close to accurate projections could be made on what losses are to be expected, which also greatly assist in verifying insurance claims.  Armed with historical information on claims handling, technology is now able to highlight the necessary operational processes the insurance industry should have in place, to adequately meet the demands of any catastrophic event,” explains Pieter Visser of Aon Benfield. 

The cost of claims are however likely to impact insurance premiums as insurers move toward individual risk profiling and rating clients according to their individual risk profile and insurance history. “A well-conceived insurance program is achieved by consulting with a professional broker who can assess your unique needs, risk profile and budget, and tailor-make an insurance offering that will safeguard your hard earned assets in the event of a loss. Your broker will also be able to advise you on the effects that a possible claim will have on your individual risk profile and, most importantly, ensure that you are paying the right price for the right amount of cover,” concludes Mandy Barrett of Aon.