Counting the cost of weather-related loss trends

There has been a rise in both frequency and severity of natural disasters globally and in South Africa, with weather-related claims having increased tenfold over the last decade. And it is likely to get worse, with catastrophe (CAT) claims continuing to increase in volatility and frequency. 

Our data shows that between 2000 and 2011, the average annual CAT claims cost R39 million, compared with the last decade of 2012 to 2022, where the average annual CAT claims totaled R371 million. 

It cannot be denied that the insurance industry and reinsurance markets are facing significant headwinds, with claims in the South African reinsurance market having exceeded R80 billion in the last three years. Events like the 2022 KwaZulu Natal floods – the single biggest CAT event in history – and more recently, devastating flood events in the Western Cape, as well as earthquakes in Johannesburg – all contribute to the worsening outlook. According to Swiss Re, severe thunderstorms have accounted for up to 70% of all insured global natural CAT losses in the first half of 2023, costing over US$ 50 billion. In addition, these losses are 54% above the half-year 10-year average and second highest since 2011. These global economic losses of US$ 120 billion are 46% above the 10-year average.   

In other words, according to ratings agency Fitch, 2022 has been the third-costliest year ever for insurers and reinsurers. It is against this background that CAT claims are likely to continue to increase in volatility, resulting in an even higher increase in the cost of reinsurance.

What does this mean from an insurance perspective?

Insurers play an extremely important role during uncertain times. The need to be there for clients during challenging times needs to be balanced with the responsibility of ensuring the sustainability of the industry. This means that insurance businesses must protect their capital base and ensure the balance sheet is evolving with climate-related risks (it is more important than ever before for the insurer to manage the balance sheet). This requires a complete rethink of the underwriting strategy. This may include de-risking from high-risk areas, and risks must be assessed at a street and suburb level in real-time. Managing exposure will become paramount. Additionally, underwriting criteria is going to change, and will need to become real time. It is going to become essential that advanced climate risk modelling must be integrated into underwriting criteria, and insurers will need to invest in cutting edge data and analytics. It needs to be understood that insurance is going to become more expensive: premiums are likely to increase as claims continue to rise due to heightened risk.

The role of the broker

Brokers play a critical role in ensuring their clients are insured appropriately – climate change makes the need for advice even more important. Policyholders need to understand that it is no longer an option to protect against climate-related risks and must also take proactive steps to manage their exposure to these risks, such as with adequate property maintenance, effective waterproofing and understanding the consequences of buying properties that are at risk of rising sea levels and flood lines. Brokers are integral in ensuring policyholders get the right advice and are properly covered. 

The non-life insurance industry has already proven its resilience in providing a critical safety net to society during times of disaster and crisis. Going forward, it is going to become even more in focus as the impact of climate change becomes a reality. It is only by working together that we will be able to chart a sustainable path forward. DM/BM

By Soul Abraham, Chief Executive for Retail at Old Mutual Insure