Changing weather patterns pose problems for insurers
SA experienced a number of correlated risk events in 2017 caused by extreme weather and natural catastrophes.
“Environmental risks have grown in prominence in recent years, with the World Economic Forum’s Global Risks Report 2018 citing extreme weather as the biggest threat to humanity this year,” says Nicholas Francis, chief marketing officer at Bryte Insurance Company.
Locally, the impact of the protracted drought, flooding events, damage from severe storms and the Garden Route fire have led to significant losses for insurers and reinsurers.
John Nienaber, executive for speciality business at Old Mutual Insurance, says the industry is facing significant loss ratios across multiple lines of short-term insurance business due to the high incidence of catastrophic weather events experienced last year.
One of the hardest hit sectors is agricultural and crop insurance, says Nico Esterhuizen, GM at the South African Insurance Association (SAIA). “The protracted drought and severe water crisis in the Eastern and Western Cape have resulted in an increase in claims from farmers, which is pushing the sector into a hard cycle. Even if rains arrive, the industry is bracing for additional losses due to the damage caused by flooding, which often follows a period of drought conditions.”
While there’s no doubt that weather patterns are changing and the intensity and frequency of adverse weather events are increasing, experts appear to disagree on whether this is cyclical, or the new normal due to the impact of climate change.
“Not everyone shares the view that weather patterns have changed permanently, because the current period of adverse weather hasn’t been sufficiently long,” says Esterhuizen. “We’ll only know definitively after a few more years. However, some insurers have started to consider climate change in their product offering and pricing.”
Despite this climatic limbo, underwriting is already more stringent in response to these natural catastrophes, adds Nienaber. “The real concerns pertain to the implications should these weather patterns become the norm and the possibility that they’ll get worse. This is because insurance must be based on fortuitous events, and not scenarios that are a fait accompli.”
The consequences of a continuation and deterioration of adverse weather events related to climate change would be tighter risk models that could result in a possible loss of insurability for policyholders in high risk areas, says Nienaber.
“This could impact those who built their homes under the water table, or those living is drought-prone areas, as insurers need to price risk responsibility and amend underwriting criteria to ensure the industry doesn’t fall into successive loss cycles.”
In the interim, Francis suggests that industry players educate customers on how climate change may be connected to risks in other categories. “With these risks expected to intensify, proactive disaster preparedness can go a long way to limiting exposure.”