Big insurance changes planned for South Africa

Major changes are set to be made to South African insurance products as the Prudential Authority approved the launch of weather index-based products to mitigate against an insurance crisis due to climate change. South Africa’s insurance industry has come under pressure in recent years, with a significant rise in life insurance claims during the Covid-19 pandemic, followed by the July Riots in 2021, and severe weather events. While the pandemic and the July Riots can be seen as one-off events, extreme weather events have become more common in South Africa. South Africa has seen a significant change from its previous status as a region relatively free of catastrophic events.  In 2023, Old Mutual Insure reported ten weather-related claims, with three major incidents leading to millions of rands in damages. These major incidents included severe storms in the Western Cape in June and again during the Heritage Day weekend in September and hailstorms across Gauteng and Mpumalanga in November 2023. These events have resulted in several consequences for insurers, including more frequent weather-related claims, higher reinsurance premiums, and increased premiums for consumers. In its annual report, the Prudential Authority warned that the local insurance industry may crack under this pressure, as there is limited data available to plan and predict these extreme weather events.  The regulator also said there is a lack of expertise in scenario analysis and climate-risk modelling in the industry, with long-term effects being difficult to interpret. This is compounded by a lack of standardised methodologies across the industry, making the financial impact very difficult to assess. The Prudential Authority has set up a Task Force on Climate-related Financial Disclosures (TFCFD) to increase the quantity and reliability of data from affected financial institutions.

One of the first benefits of this task force has been the approval of weather index-based insurance products that enable insurers to better predict and manage extreme weather events. Ronald Richman, chief actuary at Old Mutual Insure, said this will strengthen the country’s resilience to climate catastrophes. “By approving these products, the Prudential Authority is helping to address the significant issue of the insurance protection gap, helping South Africa manage the challenge of underinsurance,” he said. The insurance gap is generally defined as the difference between the insurance need and actual cover. The Prudential Authority warned that this gap is at risk of widening due to increasing reinsurance costs faced by local insurers and an uptick in claims, pushing insurance companies to reduce their coverage. These products are popular globally but have taken years to gain traction in South Africa as they do not, strictly speaking, protect policyholders against loss. This made their inclusion as an insurance product under the Insurance Act difficult and ignited intense regulatory debate. As a result, the Prudential Authority has implemented an interim solution to enable insurers to offer these products. Richman said this is a step in the right direction for the country, as it will allow insurers to offer innovative solutions to complicated loss events brought on by extreme weather. “Parametric insurance can significantly improve people’s quality of life as they automatically trigger payouts based on this predefined weather condition, providing a system-driven and cost-effective solution,” said Richman. “This will help drive the resilience of low-income households to weather-related catastrophes, especially those in informal settlements, who are often hardest hit by climate disasters.”“Cover can be cheaper than is the case with traditional insurance products due to the different basis for settling losses”.  He explained that traditional insurance is often too expensive and inflexible for effectively managing widespread climate events. “For instance, when a flood devastates a particular region, loss adjusters must travel to the affected areas to assess the damage, an expensive and time-consuming process that ultimately burdens clients with higher premiums. Parametric insurance sidesteps this issue.”