• South Africa's insurance market is confronted with increased reinsurance rates
  • Before COVID-19, South Africa accounted for over 70% of Africa's $68 billion in GWP
  • Reinsurers argued power grid failure will leave many uncovered and at risk of heavy losses

Harare-South Africa's insurance market, once considered the most developed in Africa, is facing serious challenges due to rising reinsurance rates, which are outstripping the global trend. Claims pay-outs from three major events in three years -the pandemic, recent riots, and heavy flooding, have been the primary contributors to escalating reinsurance rates, according to a recent Reuters report.

Reinsurance firms cover insurance companies against major catastrophic events that would otherwise overwhelm them, enabling them to manage risk and reduce the capital they must hold for pay-outs. As reinsurance rates have gone up, insurance firms are passing hikes onto their customers.

South Africa's relatively wealthy, developed economy and nearly three decades of political stability initially helped drive industry growth and draw in reinsurers. Before COVID-19, South Africa accounted for over 70% of Africa's $68 billion in gross written insurance premiums. South Africa was ranked fifth in the world in terms of total premiums as a percentage of gross domestic product, with its seeming insulation from natural disasters like tropical storms and earthquakes making its risk profile more attractive than other locations.

However, the COVID-19 pandemic and subsequent tidal wave of business interruption claims, politically fuelled riots and looting in 2021, and ongoing environmental disasters have left many insurers reeling. Concerns over a potential power grid failure have further exasperated an already dismal situation. Insurers became increasingly alarmed about this potential eventuality as evidence of the state power utility Eskom's neglect came to light. Eskom's ageing fleet of constantly breaking coal-fired power plants is failing to meet rising electricity demands, making South Africa's power grid more vulnerable than ever.

Insurance companies and their reinsurer underwriters worry about the dire consequences for business operations and basic services should the power grid fail. In turn, the event could trigger a deluge of claims leading to potentially crippling losses for insurers. Insurers are now concerned that curtailed coverage due to power grid failure will leave many uncovered and at risk of heavy losses.

The situation has led some insurers to notify clients that their policies will not cover grid failure, according to a recent report. Insurance executives also confirmed that some reinsurers have begun tightening the conditions of their agreements with insurance companies, leading to increased premiums and reduced coverage.

The situation is increasingly perilous for consumers, who are now paying 30% to 40% more for much less cover than before. Though there are concerns that South Africa's rapidly shifting risk profile may be impacting the business of reinsurers, data is scant as most large industry players refuse to share their data. Despite these challenges, there should be a concerted effort from all stakeholders, including the government and private insurers, to create more effective risk management policies and to bolster infrastructure to prevent mass claims pay-outs in the future.

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