Counting cost of natural disasters
SA has experienced a spate of natural catastrophes in recent years. These have ranged from tornados, flash floods and freak hailstorms to drought and fires, with the past five years in particular racking up billions of rands in damages and insurance claims.
Linked to climate change, natural catastrophes are becoming more prevalent in SA’s spring season from September to November. They are also intensifying, meaning property losses are climbing and the insurance gap between actual and insured losses is widening. Risk managers and insurers are under increasing pressure to scrutinise and revise risk management programmes in line with the new normal of SA’s unpredictable weather patterns.
According to James Ison, head of property, energy and construction at Chubb Insurance SA, severe drought conditions in the Western Cape have increased the risk of catastrophic fire losses in the region. “With water and pressure at critically low levels, local municipal water supply to fire protection systems and hydrants are negatively impacted and these systems may prove unreliable for firefighting purposes. This has implications for insurance programmes since compliance with building and fire protection codes, local by-laws and properly functional municipal services are implied conditions of the insurance policy. Given the circumstances, it’s essential that risk managers assess their fire risk engineering programmes and take action to remedy any gaps that have emerged in terms of fire-protection capacity,” says Ison.
Fire is an underrated risk despite its potentially disastrous financial and liability consequences. The Rossburgh fire in March 2017 may hold the record for the largest single property loss in SA. A Transnet warehouse went up in flames in a commercial business park just outside of Durban and it took 400 firemen four days to extinguish the blaze.
“Current estimates place the property loss in excess of R1bn alone, while the environmental liability and clean-up operations, business interruption and damages to third-party property claims could see that figure rise significantly. Just three months later, wildfires and storms in the Western Cape and Knysna added a further R3bn to underwriting losses,” says Ison.
Mitigating fire risks requires collaboration between insurers, risk managers and brokers to reassess whether current risk management programmes are still fit for industry purposes and circumstances. This is essential as failure to comply with the statutory requirements and codes of practice for fire protection can leave businesses in financial crisis and with potential legal ramifications.
According to Charles Moriarty, risk engineer at Chubb Insurance SA, risk managers also face the domino effect of the external challenges posed by a lack of infrastructure maintenance and failing municipal systems such as storm water drainage, reduced water pressure and municipal water supply to fire protection systems, and need to consider how this may impact their ability to comply with their insurance provisions.
Factors that could impact on risk programmes are both internal and external and need due consideration. For example, if the water crisis in the Western Cape is not resolved, it may necessitate the installation of onsite fire tanks and pump stations at significant cost. Compliance with the fire risk engineering standards is becoming more onerous under the current drought conditions.
“Review all fire safety controls and evacuation plans and ensure staff and tenants are trained in such plans and that exits are clearly marked and accessible. Extra precautions are needed for processes involving flammable and combustible liquids and gases, and hot work such as welding and grinding should be avoided, or conducted under stringent safety measures if necessary,” says Moriarty.
It’s essential that fire risk programmes are designed fitfor-industry purpose from the outset, ensuring the financial investment is spent on the best possible solutions and to avoid redundancy. The quality of the fire risk programme directly impacts the cost of insurance premiums based on how effectively the exposures are mitigated. Risk managers should update underwriters on all programme enhancements as these potentially could bring down the cost of insurance if exposures are reduced.
“Risk managers have a role to play in managing and maintaining the insurability of the business, arguably even more so in current conditions where a delayed, reduced or rejected claim could seriously impact business survival. The clarion call is for risk managers, insurers and brokers to work together to mitigate catastrophe exposures as far as possible and maintain insurability and affordability,” says Ison.