No cover from Cape’s burning drought for urban business
Insurers nonetheless braced for knock-on claims for fire or flood
● Drought, water-rationing and dry taps are not insurable risks or perils, meaning Cape Town businesses may carry the financial burden of Day Zero alone.
Cover for business interruption ordinarily comes into effect when businesses have to close or operate at a reduced capacity as the result of a catastrophic event, and suffer losses. But this does not include drought.
One exception is multiperil crop insurance, which is usually packaged with hail insurance and is extended to farmers in limited amounts.
Despite this, insurers may not be untouched should Day Zero arrive. Due to possible secondary impacts of the drought, such as fires, or floods when the rain returns, they may have to pay out claims to affected clients.
Businesses should discuss possible claim scenarios with insurers to mitigate risk, said Gary Ferguson of Aon South Africa’s technical claims resolution division.
“A professional broker will generally run a test scenario to assess the impact of any given event on the risk-management strategies employed by a company.
“Not only will it ensure that the insurance policy responds favourably in the event of a loss, but it will also highlight any exclusions and gaps in cover that may be present.”
A number of industries are already being affected by the drought, Ferguson said.
Manufacturers rely on water to keep heavy machinery running at optimal operating temperatures and a water shortage could affect production levels.
Beverage producers will struggle to maintain adequate stock levels in the absence of water.
Building projects are also at risk, with water being a key raw material on construction sites.
What is of particular concern for insurers is the outbreak of fires and the increased difficulty of fighting them in a drought-stricken and windy Cape Town, said Martin van Wyk, a spokesman for Auto & General Insurance.
In the event of Day Zero, which has been pushed forward to mid-May, all critical emergency services such as hospitals, fire stations and police stations will continue to function.
Water to key business districts will also not be cut.
But the flow rates and pressure levels of fire hydrants may drop, said Ferguson, and fires could become more damaging as they would take longer to be extinguished.
John Melville, Santam executive head of risk services, said businesses must therefore maintain protective measures, especially where these are a condition of cover. These include upgrades to sprinkler systems, electrical connections and assessed fire-fighting equipment on business sites.
While most insurers are watching the water crisis in Cape Town closely, an unprecedented event, such as Day Zero, is difficult to prepare for.
“It is clear that we need to explore new technologies and use advanced data analytics capabilities to gain a better understanding of risk exposures and the domino effects of our rapidly changing and unpredictable climate and environment,” said Ferguson.
On standby
Van Wyk said Auto & General had put plans in place for staff and emergency service units so that the region would continue to be serviced should there be a spike in claims.
Special risks insurer Sasria, which pays out claims for damages suffered in incidents of public disorder, said it was also on standby for claims related to the water crisis.
“Sasria will review the merits of the claim and will respond accordingly,” it said.
“As the City of Cape Town’s water crisis intensifies . . . there is a lot of uncertainty relating to this matter and we cannot anticipate what will happen. However, the water crisis will have a direct impact on service delivery in the country and is expected to result in service delivery protests.”
But Tim Harris, Wesgro CEO, said he was confident Day Zero would be avoided, given the water-saving strategies that were being rolled out in the city.
Businesses were responding by investing in infrastructure to access alternative water sources so Cape Town would remain open for business, he said.
For example, Hospitality Property Fund plans to have a desalination plant up and running next month from the basement of the Westin Hotel, which will treat one million litres of sea water to produce 400 000 litres of potable water. This project will allow 1 900 hotel rooms to be taken off the municipal grid.
Whatever the outcome, most insurers will be able to weather a period of increased claims, said Adrian Cloete, wealth manager at PSG.
“A lot of the big companies have strong balance sheets, good underwriting practices and make decent underwriting profits,” he said.
“Insurance is a cyclical business. They are equipped to pay increased claims, if it happens.”
More fires and the increased difficulty of fighting them is of particular concern We need to explore new technologies to understand the domino effects of our rapidly changing climate
Gary Ferguson
Aon South Africa