Brace yourselves for higher premiums
WEATHER patterns appear to be changing, not just in SA but around the world. Earlier this year, we saw substantial flooding in the southern hemisphere, which had significant consequences for many people, especially those in SA whose homes were located near large expanses of water, such as the Vaal River.
This was followed by two massive earthquakes in New Zealand and Japan. While the latter may seem immaterial to consumers in SA, the reality is that all of these events will impact on our day-to-day finances as the cost of insurance is likely to rise as a result.
While this is not just a South African problem — the cost of insurance is expected to increase across all personal lines globally — it is important for South African consumers to start factoring in a potential increase into their insurance premiums in the near future, including their home, contents and car policies.
Consumers are already set to absorb substantial price increases this year, with the huge proposed increase in electricity prices by Eskom in July; fuel prices at nearly R10 per litre; and the prospect of interest rates rising towards the end of this year. It is therefore essential that consumers also begin to factor in the likelihood that they will need to pay higher insurance premiums as well.
In fact, South African consumers could see a double digit increase in the cost of their insurance premium on the back of losses sustained in the first quarter of this year. The financial impact from the earthquake in Japan and New Zealand will initially be taken by reinsurance companies, who effectively insure the risk taken on by other insurers. However, these companies will need to raise their premiums to recoup these losses.
The reality is that reinsurance is a global industry and when reinsurance companies suffer a catastrophe, it has a major impact on insurance premiums across the world. Just like local insurance companies, if reinsurers are forced to pay out on substantial claims such as the natural disasters we have seen this year, the cost of recovering these losses will be passed back to their own clients.
This means that when reinsurers decide on their annual round of renewals towards the end of the year — their version of the annual premium increase that is charged to the general insurance market — this will begin a series of price increases that will, in the end, be paid for by the consumer.
Reinsurers have already estimated the financial impact from the earthquake, with Munich Re expecting a loss of €1,5bn, Swiss Re estimating its loss at $1,2bn and Hannover Re expecting a loss of €250m.
The culmination of the Japanese earthquake and tsunami following so quickly after the New Zealand earthquake and the flooding in the southern hemisphere, means reinsurers are likely to have seriously depleted, if not entirely used up, their catastrophe reserves, simply from events that occurred in the first quarter of the year.
There is no doubt that reinsurers will be able to absorb these losses, however; if they are forced to use a significant portion of their capital reserves to do so, they will have to find a way to recoup this money through higher premiums, which will ultimately have the effect of raising the price of insurance globally.
For consumers, who are already likely to face a tough time in the months ahead as costs continue to increase, the difficulties facing the insurance industry may not seem all that relevant right now, but it is vital that everybody takes seriously the impact of rising insurance costs, not only so that they are prepared when the inevitable occurs but also to ensure that there is no temptation to cut back when it becomes a reality.