Credit ratings agency S&P Global Ratings said it expects downward pressure on earnings for the insurance industry in South Africa if extreme weather trends persist.
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 added in a June 7 press statement.
The country has experienced an increase in weather-related events such as floods, wildfires and storms over the past two or three years. As a result, there has been a substantial increase in reinsurance costs and deductible levels for primary insurers.
"It is too early to assess the full financial and ratings impact on South Africa's insurance sector of this week's extreme weather events in the South and East regions. 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 later part of this year," S&P noted.
Negative rating actions are unlikely at this time, particularly where insurers have robust capital and liquidity buffers to absorb potential related claims, it added.
Primary insurers slightly decreased their reinsurance use in 2023, to about 30% reinsurance to gross premium written from 32% in 2022. The South African Reserve Bank has said the average combined ratio for primary insurers increased to 100.6% as of December 31, 2023, from 98.2% in 2022. Some primary insurers have responded by adjusting premiums upwards.
Further, primary insurers are also focusing on geocoding to determine risks in certain areas and price accordingly. This will likely 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 forward, the ratings agency highlighted.
Heavy rainfall, floods over parts of the Eastern Cape and tornadoes in the KwaZulu-Natal area experienced since June 1 in the South and East regions of South Africa led to loss of human life, damaged homes, vehicle, and public infrastructure such as schools, roads and healthcare facilities.