The recent severe weather events in South Africa’s Southern and Eastern regions since June 1 continue to test insurers’ ability to adapt to climate change, according to S&P Global Ratings.
Heavy rainfall and flooding in parts of the Eastern Cape, along with tornadoes in KwaZulu Natal, have caused loss of life and damage to homes, vehicles, and public infrastructure such as schools, roads, and healthcare facilities.
S&P indicates that it’s too early to assess the full financial and rating impact on South Africa’s insurance industry. Currently, there’s no immediate threat of negative rating actions, especially for insurers with robust financial reserves to cover potential claims.
However, if these extreme weather events persist, the industry’s profits could be affected, and insurers’ financial reserves might weaken in the long run, particularly if they coincide with challenging economic conditions, high inflation, and unemployment.
S&P plans to closely monitor developments in the latter half of the year, especially with the anticipated La Niña switch likely to worsen extreme weather conditions.
It’s uncertain whether the affected homes and infrastructure were fully insured.
Over the past few years, South Africa has experienced an increase in weather-related disasters like floods, wildfires, and storms, leading to significant rises in reinsurance costs and deductible levels for primary insurers.
In 2023, primary insurers slightly reduced their reliance on reinsurance, down to about 30% from 32% in 2022. According to the South African Reserve Bank, the average combined ratio for primary insurers increased to 100.6% by December 31, 2023, from 98.2% in 2022.
Some primary insurers responded by raising premiums and implementing geocoding to assess risks in specific areas and price policies accordingly. This approach is expected to lead to better risk selection, improved pricing, and potentially mitigate the impact of frequent weather-related events on underwriting profits in the future.
