Risk management in a changing climate
After a tough 2017, building resilience in corporate property insurance remains a burning issue. Hans Schollenberger discusses.
The fires that ravaged Knysna and the surrounding areas in June 2017, followed by heavy floods that wreaked havoc in Durban in October, highlight insurance exposures in the face of climate change. Emerald, Santam’s corporate property underwriter (in partnership with global partners and reinsurers) paid claims in excess of R2 billion in South Africa – the largest annual claims figure to date. As climate change continues to raise global temperatures, more severe and unpredictable weather events are likely to have a significant impact on property insurance.
The effect of catastrophes on premiums
From an underwriting perspective, historical data used in catastrophe models is proving less relevant, making pricing a challenge. Softer rates have allowed corporates to transfer risk to insurers, with downstream effects on reinsurers, who have borne the brunt of catastrophic events.
While corporate property has seen a growing premium pool of 6% to 8% in terms of inflation related adjustments, this has not translated into rate increases. In the face of the catastrophic events, the premium pool is insufficient to manage on-the-ground exposure. This situation has been made worse by tepid economic growth, resulting in fewer rands to spend on risk management, which means a reduced ability to take proactive prevention measures.
Global reinsurers’ prices in loss-affected reinsurance accounts could increase significantly and also affect sectors such as food and warehousing. So far, the South African market has been able to purchase catastrophe reinsurance, albeit at significantly increased terms, resulting in increased costs for local insurers. As a result, we expect premium increases for high-exposure accounts.
Proactive risk management
As climate change progresses and its effects become increasingly clear in the form of extreme weather events, insurers will be called upon to respond to increasing numbers of property claims. This is resulting in the industry reassessing its risk appetite and risk models to accommodate the additional risks. In order to build resilience into their service offering, insurers need to be more proactive in how they mitigate risk, in collaboration with brokers and clients, as well as intermediaries, engineers, city planners and municipal administrators.
Both insurers and intermediaries should be in a position to assist with the mitigation of corporate property risks with the aim of ensuring that proactive risk management is specific and relevant to both the industry sector insured and the actual risks. Ideally, it needs to happen at the planning stage.
While reinsurers and insurers can model exposure, the actual risk presented is largely influenced by engineering decisions made by the corporate entity. These could range from providing an on-site source of firefighting capability to the application of an earthquake resistant design and constructing within a 50-year flood zone. Such risk engineering is closely aligned with life safety considerations as the use of substandard materials or methods of construction has risk and loss implications that are only evident years later, at which stage retrofitting buildings is substantially more expensive.
Investing in strategic partnerships
Insurers have begun to respond to climate change in a number of ways. Santam’s work with provincial and district municipalities is beginning to help mitigate on-the-ground insurable risks to ensure sufficient disaster management capabilities in vulnerable areas.
These contributions have included the supplying of local fire stations with equipment such as fire hoses and protective gear. Other measures include improving flood defences, contributing towards better building plan approval processes and updating GIS flood risk mapping (according to updated disaster risk models from climate scientists).
Given that risk management is significantly influenced by the resourcing at municipal level, Santam has spearheaded the Santam Partnership for Risk and Resilience (P4RR) programme, a national collaboration with the Department of Cooperative Governance and the South African Local Government Association, which focuses on 10 vulnerable district municipalities and 53 local municipalities. Over the next five years, the expansion of the P4RR programme stands to benefit more than five million people.
Santam is also partnering with communities to proactively manage risk in response to lessons learned from recent disasters. Following the recent floods in the eThekwini Metro, for example, clients took it upon themselves to assist with clearing stormwater drains and protecting the drains from collapse in industrial areas. These actions all contribute to the sustainable management of risk, allowing insurers to efficiently put businesses back in the position they were before disaster struck.