How climate change could be driving up your insurance premiums

Extreme weather patterns have increased the potential for liability claims, costing both insurers and clients more, an industry expert has warned. 

In 2017, worldwide weather events, natural phenomena and large man-made disasters ran up estimated losses of $337bn (about R4.8 trn), according to global reinsurer Swiss Re Sigma.

This translated to insured losses of $144bn (about R2.05bn).

South Africa has also contended with the results of extreme weather, such as the Knysna fires, the drought in the Western Cape, and severe floods and storms in Gauteng.

Insurers and reinsurers did manage to pay valid claims. However, the increase in weather events means insurers must be aware of a likely increase in such claims in the future, explains Caroline Theodosiou, director at law firm Norton Rose Fulbright.

Having paid out large numbers of claims, the next step is to recover the monies paid out. According to Theodosiou, this is where the legal element comes in, to assess who may be liable for claims.

This could be municipalities, engineers or contractors, who may or may not have prepared for extreme weather such as floods.

Usually insurers recover from another insurer, which ultimately leads to rising costs for the industry as a whole. The cost of such events is shared across the industry by the entire pool of insurance members, explains Theodosiou.

The rising cost to the industry means the consumer cost, or premiums, will rise too, she says.

"The insurance industry needs to be able to fund claims. The only way to do that is through premiums."

However, premiums for a specific client are not necessarily linked to a specific catastrophic event - for example, in the way one’s car premium would go up if there were an accident. The increased cost is applied across the industry, and all consumers have to carry that cost in their premiums, Theodosiou says.

Insurers look at profits and losses across the industry, and take into account catastrophic losses irrespective of the cause. If they paid substantial amounts of money due to catastrophic losses in a particular year, then premiums go up across the board, she explains.

Theodosiou says this protocol is followed globally, not just in South Africa. Insurance companies are reinsured by global reinsurance companies, to which they pay premiums.

This means premiums charged by reinsurers are linked to weather events and other catastrophic losses occurring across the globe, she explained.

The associated cost is passed down by insurers to their consumers. As weather events increase, therefore, insurance premiums will also go up.

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