Insurance Sector Struggles Under Growing Claims and Government Failures in SA

The South African insurance industry is currently facing unprecedented challenges that have put a significant strain on its operations and financial stability. Growing claims arising from a combination of infrastructure deterioration, frequent load-shedding, and heightened crime levels are driving up the cost of policies in the country. With insurance being an essential pillar of economic resilience, this poses serious potential risks not only for insurance carriers but also for the wider South African economy.

Santam's CEO, Tavaziva Madzinga, recently shed light on the distress currently buffeting the industry. According to Madzinga, there's been a discernible change in South Africa's risk environment, compounded by global worries like climate change and localized socio-economic tribulations. The severe infrastructure issues, ongoing load-shedding, and increasing crime rates are creating an uptick in both the number of claims and their value.

South Africa has been experiencing a series of catastrophic events that have made headlines for their extensive economic damage. The July 2021 riots, dubbed as some of the worst in the nation's history, racked up an estimated R50 billion in economic losses. Not far behind, the KwaZulu-Natal floods of April 2022 were estimated to cost another R54 billion in losses, with the insurance industry covering half of that amount. The trend of climate change-induced events continued to dominate the sector's claims statistics in 2022 and 2023.

The increase in catastrophe-related incidents has also led to a significant rise in reinsurance premiums, thereby making it more costly for local insurers to underwrite policies. This rise is set to be passed down to consumers, leading to more expensive insurance coverage. Furthermore, attritional weather losses, or claims not linked to a major disaster but still weather-related, are putting the industry's sustainability in jeopardy.

Santam's Insurance Barometer Report for 2022/2023 highlighted a surge in flood-related claims throughout all business lines. With subsequent floods in other regions such as the Orange and Vaal Rivers and the Western Cape, the country's infrastructure vulnerabilities have been laid bare, showcasing an urgent need for restructuring.

Poor road conditions, compromised firefighting resources, and inadequate drainage systems exacerbate losses and create broader-reaching consequences in the wake of disasters. The rebuilding costs soar, recovery time drags on, and most crucially, lives are at greater risk when infrastructure is not up to par.

Madzinga noted that for the continued insurability of risks, not only is a significant investment from the government necessary but also a concerted effort from a collaboration of private and public entities. He referenced an alarming 67% increase in claims due to damage to sensitive electronic items from power surges in their personal and commercial insurance portfolios, costing R609 million in the full 2022 financial year.

On the socio-economic front, the relentless rise in crime rates, particularly pertaining to vehicle theft, is becoming a systemic risk. The Insurance Barometer Report also warned of cybercrime as a potential 'black swan' event that could be enormously costly for the industry.

Despite the array of challenges facing insurers, the industry must ensure its capability to sustain these risks, highlighting the need for comprehensive understanding and response strategies for both traditional and emerging threats.