S&P Global Ratings has warned that earnings for South African insurances companies were likely to be pressured this year following extreme weather events that left a trail of destruction in the Eastern Cape and KwaZulu-Natal provinces earlier this month.
This comes as the National Disaster Management Centre has classified the severe weather events in the Eastern Cape and KwaZulu-Natal as a “national disaster”, after floods and a tornado ripped through the provinces.
Earlier this month, heavy rains accompanied by strong winds resulted in severe flooding in most parts of the Eastern Cape, displacing more than 2 500 people, especially in the Nelson Mandela Bay and Buffalo City metros while a tornado ripped through Tongaat in Durban a few days later, leaving12 people dead and over 7 000 homes destroyed.
Some businesses have also been bracing for possible disruptions after the police deployed reinforcements in the aftermath of the elections, particularly in KZN as the province has previously been rocked by violent protests and looting during civil unrest.
S&P yesterday said “downwards pressure on earnings” for the insurance industry can be expected in the aftermath of the adverse weather conditions in the respective areas.
“The capital and liquidity buffers of insurance companies may also weaken in the longer run if weather-related claims coincide with challenging economic conditions, high inflation, and high unemployment in South Africa,” it said.
“We will continue to monitor the developments in the second half of the year, particularly as the La Niña switch is expected to fuel extreme weather in the latter part of this year.”
However, S&P said it was too early to assess the full financial and ratings impact on SA’s insurance sector after the adverse weather conditions.
Santam, SA’s largest short-term insurer has already said it received more than 254 claims for damage to property and other assets in the Eastern Cape in the aftermath of the floods, though it has not indicated the total amount of these claims.
Despite the impact of this, S&P said “negative rating actions are unlikely at this time, particularly where insurers have robust capital and liquidity buffers to absorb” potential related claims.
South Africa has been experiencing an increase in weather-related events like floods, wildfires, and storms over the past two to three years.
Resultantly, said the S&P analysts, “there has been a substantial increase in reinsurance costs and deductible levels” for primary insurers.
South African primary insurance slightly decreased their reinsurance utilisation in 2023 to about 30% reinsurance to gross premium written from 32% in 2022.
Citing data from the SA Reserve Bank, the analysts said the average combined ratio for primary insurers in SA increased to 100.6% as of December 31, 2023 from 98.2% in 2022.
“Some primary insurers have responded by adjusting premiums upwards. They are also focusing on geocoding to determine risks in certain areas and price accordingly,” S&P noted.
This was likely to lead to a greater selection of risks and better pricing and may limit the impact of high-frequency weather-related events on underwriting profits going forwards, S&P said.
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