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Monday, September 29, 2014 - 02:16
Risk storms are gathering

In the last two years, three major hail storms made headlines as they ripped through Gauteng.  Each one left extensive destruction in its wake, collectively costing the insurance industry a staggering R2.5 billion in losses.  While this may sound like an outlandish amount, South Africa’s reinsurance catastrophe models are designed to protect against a Probable Maximum Loss (PML) of up to R30.8 billion in the event of a cataclysmic disaster such as an earthquake or a tsunami.

South Africa requires a catastrophe market loss of R430 million in order to activate its catastrophe layer of reinsurance cover. In a worst case scenario, such as an earthquake, a net sum insured value of R6.7 trillion will require a 400-year return period, based on the net retained sum insured on property and vehicle cover.
According to Pieter Visser, a Catastrophe Analyst at Aon Benfield, hail storms are not an uncommon occurrence. “They take place across the length and breadth of South Africa on an annual basis. But what makes the three events in Gauteng noteworthy is the net retained exposure that the province represents. Gauteng’s built-up area constitutes only 0.5% of SA’s land surface area but, due to the fact the area is densely populated, the province constitutes 35% of the exposure to catastrophic events such as hail storms,” he explains.
The growth of lower income households in the property market also presents its own challenges. “Hail damage to a property that is worth R500 000 and one that is worth R2 million would be virtually the same. The cost of replacing a window or a roof, for example, equates to the same amount regardless of the property or its location. Even in the motor vehicle insurance market, losses are much higher than in the past due to changing manufacturing methods, increasing costs of vehicle parts and the like,” says Visser.
What this means, especially for properties that are valued below R1 million, is that the catastrophe premium component of their insurance cover is likely to be too low and that insurers will have to relook their pricing methodologies for these exposures. To address the issue, the insurance industry may need to increase rates or implement higher excess payments that are levied in the event of a catastrophe, such as a hail storm.
There are, however, a few things that can be done to mitigate the risk of hail damage and a good place to start would be to heed weather warnings. “Home maintenance is critical,” says Mandy Barrett of Aon South Africa. “Roof tiles and windows receive the most damage during a hail storm, which makes it important to check the quality of roof tiles and the thickness of window glass to protect against damage and injury. The increasing focus on green technology also means that many households have solar geysers and panels that are greatly at risk during a hail storm due to their structure. It would be wise to check whether these items are included under your homeowners’ insurance cover,” she warns.
It took a great deal of time for insurers to repair the damage and settle claims in the aftermath of the recent hail storms in Gauteng and it was mostly due to a lack of capacity from suppliers. “For this reason it is advisable to check whether your homeowners’ insurance offers a Home Assistance Service, as it will greatly aid in the completion of emergency repair work that needs to be addressed in order to avoid a bigger problem. These services generally include plumbing, electrical wiring and even the services of a locksmith,” advises Barrett.

Technological advances however abound, enabling the insurance industry to map storm damage by means of geographical information systems with the support of radar data. Observes Pieter Visser, “Within 24 hours of an event, close to accurate projections can be made on what losses should to be expected, which also greatly assists in verifying insurance claims. Armed with historical information on claims handling, technology is now able to highlight the necessary operational processes the insurance industry should have in place, to adequately meet the demands of any catastrophic event.”
The cost of claims are, however, likely to impact on insurance premiums as insurers move toward individual risk profiling and rating clients according to their individual risk profile and insurance history. “A well-conceived insurance program is achieved by consulting with a professional broker who can assess a client’s unique needs, risk profile and budget, and tailor-make an insurance package that will safeguard an individual’s assets in the event of a loss. The broker will also be able to advise on the effects that a possible claim will have on an individual risk profile and, most importantly, ensure that the policyholder is paying the right price for the right amount of cover.”

Copyright © Insurance Times and Investments® Vol:27.9 1st September, 2014
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