IIG News

Climate Risk – The impact on underwriting approaches

Climate change refers to long-term shifts in temperatures and weather patterns. Such shifts can be natural, due to changes in the sun’s activity or large volcanic eruptions. But since the 1800s, human activities have been the main driver of climate change, primarily due to the burning of fossil fuels like coal, oil and gas.
The month of July 2023 is now officially the hottest month since records exist, with average temperatures around the globe some 1,18 degrees celsius higher than the average between 1951 and 1980. Parts of North Africa was especially hot, experiencing temperature increases around 4 degree celsius. The scientists tell us that temperatures in 2024 will be even higher and that over the next decade and that we will describe the average temperatures over the last three years as the “coolest” since climate change was recognised as a phenomenon.
The financial cost of global natural disasters in 2022 amounted to an estimated US$313 billion in economic losses, with the insurance sector covering about US$132 billion, making it the fifth most expensive year for insurers. In less well developed countries the insured losses are much lower but the economic cost and human suffering is just as great, if not greater when compared to more developed nations. Pakistan is not likely to recover from last year’s devastating Monsoon floods for many decades, if ever. Large cities in countries like Bangladesh and Indonesia face an inevitable disappearance into the sea unless costly and urgent action is undertaken.

It seems that we all need to learn a new word to add to our arsenal of human endeavour if we are to survive this existential onslaught of mother nature: Resilience. So much of human life as we know it has been built on the foundation to generate wealth and prosperity through human creativity. It is now clear that we are also going to need to strengthen resilience to mitigate the exposure to socioeconomic change and concentration risk in vulnerable areas.
South Africa does not have a great record in its management of public disaster projects. Our fiscal constraints generally do not allow for much focus on early detection and warning systems. Mobilising our limited resources in the event of catastrophic events is also not a strong point. In the recent past, we have all too disappointingly seen these failures with the political unrest in the East of our country, followed by the floods in KZN Province and then with the recent floods and Taxi violence in the W Cape.
Our industry prides itself as being amongst the most developed and professional on the continent. As managers of the largest economic unit in Africa, we interact freely with our counterparts in many first world countries. Our brokers and advisors are sought after as innovators and skilled advisors. This is all true. But what does that mean for the needs of our clients and communities in the face of this new Climate crisis. Almost two years after the KZN floods, much of the local infrastructure that both contributed to and suffered damage as a result of the floods are still in a state of disrepair. The Region is simply in no shape to withstand another deluge even approaching the level of the last one, which claimed the lives of more than 500 people.
Recently we also witnessed the vulnerability of other parts of our country, Gauteng, Mpumalanga and W Cape to flood risk, where rain conditions were only slightly above normal. We have previously seen the damage wrought by runaway fires in the Cape which we have not been able to extinguish for weeks – all in conditions that climatologists would now call benign.

So resilience is a word we need to learn and appreciate with some urgency. Our industry’s role is to dampen the negative impacts from natural disasters on people and businesses and to reduce the financial shocks from such events. We understand the nature and impact of risk management as a vital component of our effectiveness. Unfortunately, in modern South Africa, risk management practice is not something we can take for granted or as a given.
Put simply, what are the mitigation strategies we can rely on to help to reduce the risk profile of our clients and our society? Following the global wake up of Covid 19, we have seen insurers and reinsurers resort to the “fine print” of their contracts. We now try to say what we mean and work hard to mean what we say. While there is a sense of reality that we cannot go on the “old way”, we still do not have a clear path forward. Globally we still seem to be meandering – even dawdling – somewhat. But this has to stop. We are facing a new reality with everyday becoming ever grimmer and darker than the one before. We have to move forward to embrace the emerging risk at a faster pace if we are to help society overcome. The increasing cost of insurance risk cover is becoming more challenging for insurers and their clients alike. Climate change is a massive loss driver and we should expect it to drive prices negatively over time. It wasn’t that long ago when the rate for Storm cover was 0.100% and Earthquake cost 0.037%, both rates being ex VAT. Market competition has long since made this a distant memory even as we can imagine these rates making a reappearance in the foreseeable future. However we require a continuous approach to updating underwriting methodologies that do not rely on rates alone to maintain price adequacy.

We need a new sense of perspective. The gaps in the way our society operates do not align with the new and emerging risks we face. We need more effective collaboration between the public and private sectors for a better, more resilient country. Our politicians need to get on with better regulation of our socio-economic environment. Our infrastructural needs deserve appropriate attention not just to get our economy going but also to preserve what we have. The Eskom power vacuum needs to be filled with a reliable and vibrant new energy network. The world is facing an existential crisis but so does SA. There is a lot that can be done but we must get on this new track soon. We will not long be able to avoid engaging the State in the development of specific public-private partnerships to reduce the consequences of unavoidable damage. Mandatory insurance for natural perils like storm, drought and earthquake could be the only affordable way to soften the societal and economic shock of natural catastrophe events and keep premium rates stable.
The insurance industry has a wealth of data and knowledge, and using this knowledge is a way forward both in terms of keeping people safe and insurance economically sustainable. Improving resilience begins with teaching risk awareness in schools and making information about natural disasters available and transparent to all levels of society as they happen. We need to get on with building a robust and resilient society to deal with our new reality. Hopefully we can make a difference not only for the future of our industry but also our Planet.
Article written by MA Samie