Insurers are refusing to cover future pandemics - SA may need a new type of Sasria

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KPMG SA says insurers and reinsurers are walking away from insuring natural disasters like pandemics. This could create an insurance gap that cripples economies in future.
KPMG SA says insurers and reinsurers are walking away from insuring natural disasters like pandemics. This could create an insurance gap that cripples economies in future.
Amarjeet Kumar Singh/Getty Images
  • KPMG SA says insurers and reinsurers are walking away from insuring disasters such as pandemics.
  • This could create an insurance gap that cripples economies in future unless a private-public insurance arrangement is made.
  • Many short-term insurers, including SA's biggest, Santam, have already amended their policies to exclude pandemics.

While the pandemic hit life insurers hard - the industry lost R2.6 billion because of Covid-19 provisions - South African short-term insurers swam through the Covid-19 tide and emerged on the other side almost unscathed.

Save for Santam and Old Mutual Insure, short-term insurers still grew their net profit or recorded the same levels as in 2019, KPMG SA's 2021 South African Insurance Industry Survey showed.

KPMG SA surveyed 40 short-term insurers, 21 life insurers and seven reinsurers, and found that the pandemic has curtailed their appetite for covering certain risks in future.

Nishen Bikhani, a partner at KPMG SA, said the higher than expected frequency and severity of natural disasters, including pandemics, will potentially reduce reinsurance coverage. Insurers rely on reinsurance cover to hedge their unknown losses arising from pandemics.

Without the certainty of that cover, or should reinsurance premiums start to skyrocket, there could be negative implications for economies at large because of the insurance gap that this could create.

"That, in my opinion, is what we really need to be talking about, where the conversation should be focused. What happens when there is no protection in this area, and what should be done to adapt to the risks associated with natural disasters?" said Bikhani.

In the short-term insurance industry, many companies - including Santam - have already amended their policies to exclude pandemics after the courts forced them to pay lockdown-related business interruption claims.

In the survey report, Bikhani wrote that there were few instances where reinsurers rejected claims made by insurers.

Some of those disputes ended up in courts. But most reinsurers absorbed those losses. This might explain why insurers have now amended their policies to exclude pandemics.

But what will happen if no one wants to insure these risks anymore?

"I think there's an expectation that this moves towards some sort of quasi-government arrangement. Some would say we need an organisation similar to Sasria [the South African Special Risk Insurance Association] to pick up these losses if insurers and reinsurers are walking away," said Bikhani.

Sasria is a government entity that provides cover for loss or damage to insured property due to terrorism, political violence, strikes and riots. It has cover of up to R500 million and additional coverage of R1 billion. The association cannot cancel nor refuse cover.

He reckons that there needs to be some binding relationship between the private insurers and government to pool together funds to cover risks that end up being more economic losses as opposed to insurance losses.

KPMG SA said the next few months will be challenging for the life insurance industry too. Companies will need to make challenging moral decisions as they debate vaccine mandates for employees and whether they should raise their premiums adjustments for policyholders who refuse to get vaccinated.

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