Floods and fires: can insurers weather another horrible year?

The floods that tore through the Western Cape almost two weeks ago have once again brought to the fore catastrophic insurance incidents in South Africa. And they have also brought the possibility of even more expensive reinsurance premiums for short-term insurers. 

In addition to 11 people losing their lives, the province’s infrastructure was hard hit. “Current estimates of damage to the provincial road network [excluding that of the South African Roads Agency Ltd] is in the region of R500m,” Regan Thaw, media liaison officer in the office of premier Alan Winde, tells FM. 

It’s the second large-scale flooding in South Africa since last year’s deluge in KwaZulu-Natal, which cost insurers more than R17bn in claims. 

Outsurance describes the damage as “significant”, adding: “The reach of the storms was widespread, with no single area standing out.” 

Yet Discovery Insure CEO Robert Attwell estimates the damage to be smaller than last year’s KZN disaster. 

“We have received about 500 claims [from damage in the Western Cape], which is a quarter of the number we got after the KZN floods,” he says. 

The two insurers that are likely to be most affected by the flooding are still tallying the damage. 

“Short-term insurers Santam and Outsurance will be most affected, given the nature of their products,” says Pierre-Jean Prinsloo, analyst at Centaur Asset Management.

Outsurance says it has so far received more than 600 claims, with most of the damage being to buildings.

“We believe we have received the majority of the claims for the event, but it is still too early to quantify the loss.” 

Santam is still awaiting more information. “At this stage it is too early to quantify the extent of the damage or how much the claims will amount to,” CFO Wikus Olivier says. “What is certain is that there will be claims.” 

Two factors in particular played havoc during the flooding: abnormally high rainfall and a wayward spring tide that damaged coastal residences. 

“Though the storm had a large spatial extent, the affected areas experienced rainfall of varying severity,” Olivier says. “Areas that recorded the highest rainfall, for example Franschhoek, exceeded the statistically estimated one-in-100-year rainfall figures for the specific catchment.”

According to Olivier, a once-in-a-century storm and one-in-50-year storm have, respectively, 18% and 33% probabilities of occurring at least once in 20 years.

“It is thus not considered that this storm was out of the ordinary when looking at a longer period of observation,” he says.

Besides the June 2023 storm, other significant storm events in the Western Cape include the Lourens River flood in 2013, the West Coast to Overberg storm in 2007 and the catastrophic Karoo floods of 1981. But Attwell describes the September flood as “the largest in the Western Cape in our existence”.

The problem is, coming so soon after the KZN disaster, the Cape floods place South Africa firmly on the list of catastrophe-prone geographies. This matters for insurers’ bottom lines as reinsurers “harden” their stances, and increase their premiums, for South Africa. This has been a trend since the Knysna fires of 2017. 

The floods place South Africa firmly on the list of catastrophe-prone geographies

“This has resulted in a combination of higher premiums as well as higher retention of risk,” says Prinsloo.

Olivier agrees. “The recent floods are costly and will contribute to the global impact of the many other significant natural hazard events that has already occurred in 2023.” 

But South Africa is hardly unique.

In August, runaway fires on Hawaii’s Maui Island destroyed more than 2,000 buildings and killed 93 people, with damage estimated at about $5.52bn. The Atlantic Council, an American think-tank, estimates in its latest report on the topic that extreme heat events lead to an economic loss of $100bn to the US economy each year and that this will reach $500bn by 2050. Fires, and then floods, ravaged parts of Greece this year too.

Yet the potential financial impact for insurers is still hard to calculate. Certainly, the share prices of the two standalone short-term insurers on the JSE, Santam and Outsurance, hardly tell a story of woe. Santam’s share price has gained 14.1% over the past year, and Outsurance is 47% higher — against a 14% gain for the JSE financial 15 index.