NatCats demand more sophisticated risk engineering programmes

Risk managers and insurers are under increasing pressure to scrutinise and revise risk management programmes.

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NatCats

Risk managers and insurers are under increasing pressure to scrutinise and revise risk management programmes in line with the new normal of South Africa’s unpredictable weather patterns, as South Africa has experienced a spate of natural catastrophes (NatCats) in recent years, including tornados, flash floods, freak hailstorms, deluge, drought and fires.

Catastrophes, particularly in the last five years, have caused billions of rands in damages and insurance claims. Linked to climate change, NatCats are becoming more prevalent in South Africa’s spring season from September to November. They are also intensifying, causing property losses to climb and the insurance gap, between actual and insured losses, to widen.

Drought conditions under fire

James Ison, head of property, energy and construction at Chubb Insurance South Africa, says severe drought conditions in the Western Cape have increased the risk of catastrophic fire losses in the region.

“With water and pressure at critically low levels, local municipal water supply to fire protection systems and hydrants are negatively impacted and these systems may prove unreliable for fire-fighting purposes. This has implications for insurance programmes since compliance with building and fire protection codes, local by-laws and properly functional municipal services are implied conditions of the insurance policy. Given the circumstances, it’s essential that risk managers assess their fire risk engineering programmes and take action to remedy any gaps that have emerged in terms of fire-protection capacity,” Ison says.

Fire is an underrated risk despite its potentially catastrophic financial and liability consequences. The Rossburgh fire in March 2017 may hold the record for the largest, single property loss in South Africa. A Transnet warehouse went up in flames in a commercial business park just outside of Durban, taking 400 fireman four days to extinguish the flames.

Read more: Catastrophe bonds help to rectify underinsurance of natural hazards

“Current estimates place the property loss in excess of R1 billion, while the environmental liability and clean-up operations, business interruption and damages to third party property claims could see the figure raised significantly. Just three months later, wildfires and storms in the Western Cape and Knysna added a further R3 billion to underwriting losses. There are multiple links to fire losses that go well beyond physical damage, such as public liability, environmental damages, site rehabilitation, damage to third party property, legal liability, business interruption and reputational damage,” Ison says.

The role of insurers and risk managers 

Mitigating fire risks requires close collaboration between insurers, risk managers and brokers to reassess if current risk management programmes are still fit for industry purposes and circumstances.

This is essential as failure to comply with the statutory requirements and codes of practice for fire protection can leave businesses in severe financial crisis and with potential legal ramifications. Ultimately, ownership of fire risk engineering programmes rests with the risk manager, however these should be developed in close consultation with insurers, brokers and technical specialists.

“If the water crisis in the Western Cape is not resolved, it may necessitate the installation of onsite fire tanks and pump stations at significant cost.”

Charles Moriarty, risk engineer at Chubb Insurance South Africa, says risk managers also face the domino effect of the external challenges posed by a lack of infrastructure maintenance and failing municipal systems such as storm water drainage, reduced water pressure and municipal water supply to fire protection systems, and need to consider how this may impact their ability to comply with their insurance provisions.

Factors that could impact on risk programmes are both internal and external and need due consideration. For example, if the water crisis in the Western Cape is not resolved, it may necessitate the installation of onsite fire tanks and pump stations at significant cost. Compliance with the fire risk engineering standards is becoming more onerous under the current drought conditions.

“Practical approaches towards ‘derisking’ properties through enhanced risk engineering programmes can assist in reducing the risks faced by property owners, and in turn insurers. There are a number of easily implemented measures that can be taken, such as decongesting aisles and warehouses, increasing fire watch guards and patrols, ensuring that stacking heights are adhered to and, where feasible to do so, reducing inventory held onsite.

“ART is a method of protecting business assets by making use of non-traditional methods available in the insurance market.”

Review all fire safety controls and evacuation plans and ensure that all staff and tenants are trained and well versed in such plans and that exits are clearly marked and accessible. Extra precautions are needed in so far as processes that involve flammable and combustible liquids and gases and hot work such as welding and grinding should be avoided, or conducted under stringent safety measures if necessary,” Moriarty says.

It’s essential that fire risk programmes are designed fit-for-industry purpose from the outset, ensuring that the financial investment is spent on the best possible solutions and to avoid redundancy. Second, the quality of the fire risk programme directly impacts the cost of insurance premiums based on how effectively the exposures are mitigated. Risk managers should also update underwriters on all programme enhancements as these potentially could bring down the cost of insurance if exposures are reduced.

Certain industry types also present unique fire exposures and demand superior risk engineering programmes. In such instances, underwriters will look to manage their line size exposures and potentially reduce the impact of a major loss by apportioning the risk across multiple carriers, increasing excess deductibles or considering alternative risk transfer strategies (ART) where the risks are considered uninsurable.

ART is a method of protecting business assets by making use of non-traditional methods available in the insurance market, and is most suited to clients with mature risk strategies and focused commitment to loss prevention.

“Risk managers have a fundamental role to play in managing and maintaining the insurability of the business, arguably even more so in current conditions where a delayed, reduced or rejected claim could seriously impact business survival,” says Ison. “The clarion call is for risk managers, insurers and brokers to work together to mitigate their catastrophe exposures as far as possible and maintain insurability and affordability.”