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Weathering the risk of climate threats

A recent report from S&P Global highlights that the increasing frequency and severity of natural catastrophes are causing insurers to review their offerings. This could potentially lead to higher premiums.

The three biggest risks facing the insurance industry are:

• The physical risk: floods, storms, droughts and fire that could result in damage to property, assets and disruption of trade.
• Liability risks: other parties who have suffered damages from the effects of climate change will seek compensation from reinsurers.
• The increase in reinsurance premiums.

Locally, weather-related loss incidents are increasing in both frequency and severity due to changing global climate conditions that spark extreme heatwaves, difficult-to-contain wildfires and significant rain/storms/flooding. Various disaster events in the SADC region – such as the cyclones experienced in Mozambique, Zimbabwe and Malawi – indicate the shifts in global weather patterns. Apart from the loss of homes and shelters, transportation and crop sustainability, the broader impact extends to business disruption in trade and financial losses to the insured company. It also often leads to a loss of employment.

A new Willis Re Hail Catastrophe Risk Model for South Africa shows seven of the top 10 insured natural catastrophe events since the 1970s have been associated with hail, with upwards of 45% of the total value of insured motor and property claims from natural perils over that period caused by hail damage.

“The frequency coupled with the potential for severe loss accumulations can threaten insurers’ earnings stability (their ability to pay dividends to their shareholders). Motor books are particularly susceptible to large hail claims. For many South African insurers, a violent hailstorm over Johannesburg’s N1 western bypass at peak rush-hour would probably be one of their worst nightmares, and since thunderstorms (which often produce hail) tend to develop in the afternoon and early evening in the summer inland, this is a very real possibility,” says Geoffrey Saville, head of weather and climate risks research at Willis Re.

More stress and scenario testing must be undertaken by insurance companies to mitigate the financial risks that climate change poses. The following must be taken into account:

• Analysing pricing and exposure management taking into account ways to price for these events based on underwriting criteria against the profile of the insured. Understanding the varying exposure that different perils may have on property and assets assists when the weather history for the specific area is taken into account along with the classification of property size and age; distance measures from rivers, lakes, sea, forests and farms, location to large water bodies, breakaway wildfires and seismic activity.
• Developing new methods based on emerging climate-change risks and accessing greater data sets to offset historical data.
• Improvement of risk modelling to include the non-modelled catastrophes and non-modelled regions that fall outside of the normal catastrophe models.
• Consideration of the risk conditions for underwriting based on specific risk metrics and underwriting risks individually lead to informed decisions on specific conditions and excesses on risk.

As an emerging market coupled with significant socio-economic challenges including a struggling economy, high unemployment, educational and healthcare risks, the impact of extreme weather patterns must to considered to model the insurance support required by individuals as well as businesses to ensure sustainability.

By Wilma van der Walt, Executive of customer experience and operations at PPS Short-Term Insurance.