Introduction
South African insurance companies are facing a formidable challenge as climate change emerges as the most significant threat, potentially leading to substantial hikes in insurance premiums. A top official at Old Mutual Ltd., the country’s largest insurer by assets, highlights the rising costs of reinsurance and the potential repercussions for both the industry and policyholders.
Reinsurance Costs Surge Amid Climate Events
1. Decade of Stability Ends
For Old Mutual Ltd., the cost of reinsuring against catastrophic events remained relatively stable throughout the decade leading up to 2020. However, recent developments signal a shift, with reinsurance costs experiencing an alarming increase of up to 30%, according to Garth Napier, managing director at one of Old Mutual’s units.
2. Multiple Triggers
The surge in reinsurance costs is not solely attributed to the ongoing challenges posed by the COVID-19 pandemic. Napier points to the severe flooding in 2022, one of the worst in almost three decades, causing landslides and extensive damage. Reinsurers, responsible for underwriting insurance companies, paid out a staggering 30 billion rand ($1.6 billion) for this catastrophe alone.
3. Industry Reimbursements
Over the past three years, the insurance industry in South Africa has had to reimburse more than 100 billion rand for various crises, including the pandemic, floods, and riots. These financial strains are a direct consequence of the increasing frequency and severity of climate-related events.
Climate Change: A Growing Concern
4. Industry’s Biggest Concern
Garth Napier emphasizes that the most significant concern for the insurance industry is the impact of climate change, leading to a substantial increase in the frequency and severity of catastrophic events. The data supports the observation that both South Africa and the world are experiencing a rise in the number of such events, resulting in more significant damage than in the past.
5. Customer Impact: Premium Hikes
In response to the escalating challenges, customers may face the brunt of the impact through an estimated 10% increase in insurance premiums across the board this year. The surge in reinsurance costs directly translates into higher operational expenses for insurance companies, which, in turn, may necessitate passing on some of the burden to policyholders.
6. Economic Vulnerability
South Africa, already highly vulnerable to climate change, ranks 96 out of 182 countries assessed under the Notre Dame Global Adaptation Initiative index. The nation’s economic risks are compounded by its reliance on rain-fed farming and natural resources, making it imperative for the insurance industry to adapt to the changing climate landscape.
Conclusion
As climate change takes center stage as a formidable threat, the South African insurance industry is bracing for a challenging period marked by rising reinsurance costs and potential premium hikes. The call for adaptation and resilience becomes crucial, not just for insurers but for the broader economy, emphasizing the need for sustainable practices and proactive climate management.
