By Pamela Ramagaga, General Manager Insurance Risks at the South African Insurance Association

Few would have missed the apocalyptic scenes of the fire in January this year that destroyed over 115 square kilometres, equivalent to most of Sandton, along the Pacific Palisades outside Los Angeles in the United States. The fire claimed  29 lives and destroyed more than 17,000 structures. 

Figures vary on the cost of the economic loss, ranging from $35 billion, according to the data analytics firm Verisk, to AccuWeather’s estimate of $57 billion. Whatever the final figure, the numbers have staggered the non-life insurance industry globally.

According to a Munich Re report, in 2024, natural disasters caused $320 billion in losses worldwide, with $140 billion covered by non-life insurance. These insured losses exceeded the averages of the past three decades. The year was the third most expensive for insured losses and fifth for total losses since 1980. Weather-related events accounted for 97% of insured losses. 

Approximately 11,000 people died due to these disasters. Floods, wildfires, and severe thunderstorms, known in insurance as non-peak perils, contributed $136 billion in damages, with $67 billion insured. Non-peak perils are increasing losses, while peak risks like tropical cyclones and earthquakes continue to cause loss volatility.

“The destructive forces of climate change,” states the report, “are becoming increasingly evident . . . Societies need to prepare for more severe weather catastrophes.” Insurers must expand and adapt their risk models to address climate change to close the protection gap.

Closer to home, in April 2022 floods in KwaZulu-Natal (KZN) had already highlighted growing climate change risks. Santam, South Africa’s largest non-life insurer, recorded its largest flood loss in 105 years, paying out approximately R4.3 billion in property damage claims from the disaster.

Beyond the tragic loss of 448 lives, more than 40 000 people were displaced and more than 12 000 homes were destroyed. The economic damage was roughly R54-billion, with insurers and reinsurers covering R27-billion of the loss. The infrastructure damage reached R17-billion. This was the third major weather-related disaster in KZN in four years.

Climate change also affected the Eastern and Western Cape in 2022, and the Orange and Vaal Rivers recorded unusually high floods in early 2023. These events disproportionately affect poorer communities, amplifying South Africa’s existing social pressures and emphasising the need for stronger climate resilience strategies.

President Cyril Ramaphosa has stressed the need for investing in climate-resilient infrastructure and policies. He emphasises that building resilience transcends environmental stewardship, extending to economic stability, particularly the non-life insurance sector's capacity to address emerging risks. 

The economics of commercial insurance arrangements are straining to cope as the rising cost of insurance threatens to make coverage for severe weather events unaffordable. Regulatory efforts to cap premium rises, as implemented in California, prompted insurers and reinsurers simply to withdraw from the market. 

There is a growing concern that the frequency and scale of extreme weather events and natural catastrophes may mean reinsurers increase premiums for insurance companies as well as declaring certain risks as uninsurable, that is, cannot be sustainably insured. These concerns are catalysing regulatory and market transformations, as the sector pursues coordinated strategies to mitigate climate-related risks.

The South African Insurance Association (SAIA) is concerned that many individuals and small businesses do not have non-life insurance. For example, fewer than  a third of the 12.1-million registered vehicles in South Africa are insured.  

Economic losses are devastating for a country with a low insurance penetration, ours is less than 8%, as greater pressure falls on the government for relief and recovery support to those not insured. It is, therefore, critical for the government and the non-life insurance industry to work together to create a more resilient country, especially against increasing weather-related events.  

The formation of the South African Special Risks Insurance Association (SASRIA) in 1979 and its record over the decades is a well-established example of how collaboration between government and insurers can work successfully.

SASRIA, now 100% owned by government, is the underwriter, while the non-life insurance industry is the distribution channel. SASRIA enabled South Africa to be resilient in the wake of the July 2021 riots. The National Treasury, as sole shareholder, backed SASRIA following these devastating riots. The non-life insurance industry remains a critical partner to SASRIA to provide resilience against this risk.

SAIA advocates for establishing a similar partnership with the government to cater to growing risks of extreme weather events. 

This pooled solution would accumulate funds over time, reducing insurance risks and moderating premium increases even as reinsurers raise rates and expand exclusion criteria for climate-related events.

Against the backdrop of increasing climate variability, South African insurers are integrating climate data and sophisticated risk models. These efforts aim to better assess, and price risks associated with droughts, floods, and other weather extremes. This approach is critical and aligns with global trends of investing in climate resilience. Around the world, insurers are taking bold steps to adapt to the changing climate, and there is much we can learn from them. 

In the Netherlands, insurers and local governments worked together to build flood management systems, reducing the risk of damage from rising water levels. By integrating cutting-edge infrastructure, they've protected communities from catastrophic losses, leading to fewer claims and a more resilient future.

In Australia, the insurance industry invested heavily in renewable energy projects to reduce exposure to climate risks and diversify its portfolio.

South Africa has the chance to leverage these lessons. The country’s pool of institutional capital – the industry holds nearly R1.8 trillion in assets—can be channelled into sustainable infrastructure projects to reduce climate risk. 

Insurers are becoming more proactive in developing solutions that reduce risk and protect their clients. In the Western Cape, insurers are incentivising property owners to make similar investments as part of a broader climate adaptation strategy.

Insurers and reinsurers worldwide are adopting technology, especially geocoding, to better assess and respond to systemic risks like extreme weather. Geocoding helps insurers evaluate property risk based on location, improving their understanding of both current and emerging threats. 

While technological innovation is gaining momentum, the sector must contend with regulatory hurdles, cybersecurity concerns, and legacy Information Technology systems. Regulatory bodies in South Africa are beginning to craft guidelines that foster innovation without compromising consumer protection. This balancing act is central to the sustainable evolution of the market.

South Africa’s non-life insurance industry has adopted a proactive approach to risk management by collaborating with local, provincial and national authorities to strengthen infrastructure. Additionally, the industry supports broader initiatives with the SAIA and the Fire Protection Association of South Africa (FPASA).

The insurance industry sits at a key node of our nation’s response, holding both a responsibility and an opportunity to lead meaningful action.

Aligning investment portfolios with sustainability goals will drive the development of climate-resilient infrastructure and innovative risk modelling to anticipate evolving scenarios. This will require collaboration between insurers, government, and local communities to bring about real, immediate change.

This is not just an opportunity but an imperative and we must act with urgency. The time for transformative action is now.