Losses from South Africa’s recent Cape storm and fires in Knysna have made it a tough start to the year for insurers in the region, as analysts warn the industry will come under pressure to manage the growing claims costs, although a cushion will be provided by reinsurance cover.
Earlier this week Cape Town was hit with its worst storm in 30 years and more than 26 fires sent the region surrounding Knysna up in flames, causing millions of rand worth of property damage and the evacuation of around 10,000 people.
“The fires and storm will be claimed as an event and would be covered under the reinsurance cover which insurers are part of. Insurance companies like Santam have reinsurance cover in place and that limits insurers like Santam’s losses to a cap amount. This varies around R50m and R100m per catastrophic event like the recent floods or fires,” said Adrian Cloete, portfolio manager at PSG Wealth, the Business Day reported.
Other estimates suggest an industry loss of up to 4 billion Rand, which could mean a US$300 million hit to the sector, enough to raise some insurance prices, analysts say.
The wildfires were driven by winds of over 50 km/h, destroying properties in 20 suburbs; the Western Cape Disaster Management Centre said the Knysna fires were one of the most destructive blazes in recent memory.
An analyst at Electus Fund Managers in Cape Town, Richard Hasson, told Bloomberg; “Profit will be under pressure. In a weak economic environment, such as low gross domestic product growth and increasing unemployment, claims typically pick up, which will not be good for them. The recent fires and storms will affect the companies.”
In this challenging environment, reinsurance programmes will help to cushion the losses to insurers, however, their shrinking profit margins could make them highly vulnerable to any further natural catastrophe blows this year.
Australian insurer IAG blew the lid on its reinsurance cover after it was hit with Cyclone Debbie and Sydney hailstorm losses; and has just announced the purchase of an additional $1 billion of reinsurance catastrophe cover to cushion it against heavy losses for the remaining calendar year.
And insurers operating in South Africa could follow suit if future natural catastrophes further rock the industry’s boat, making the need to protect balance sheets a higher priority.