Santam and Hollard pull cover for grid failure

As South Africans contend with the worst load shedding on record, the insurance industry faces a dilemma that has triggered the introduction of exclusionary clauses exempting insurers from paying out claims arising from an electricity grid failure.

Unlisted insurance giant Hollard has informed its clients that it won’t be covering any losses caused by the collapse of the national grid, with Santam due to implement a similar exclusion in April.

Read: Darkness increases insurance claims

In a letter to clients that Moneyweb has seen, Hollard simply states: “Electricity Grid Failure exclusion is added.”

This will spare the company from having to cover any losses or damage occurring as a consequence of a partial or complete collapse of Eskom’s power supply.

“While grid failure remains unlikely, it is unfortunately now a possibility and reinsurers have indicated that they will not provide reinsurance cover in this eventuality,” Hollard spokesperson Warwick Bloom tells Moneyweb.

“This means that electricity grid failure – as defined in our letter to our clients – is an uninsurable event. Along with other insurers, Hollard is attempting to make this clear for policyholders.”

Pressure from global reinsurers

Santam, South Africa’s biggest short-term insurance group, reported a 60% rise in claims for damage to sensitive electronic items in September when it delivered its half-year financials.

The insurer said that in its efforts to reduce its exposure to business interruption claims, it will, from 1 April 2023, cease providing cover for electricity grid failure claims. This will be applied on renewal of policies and to all new policies.

“The unprecedented levels of load shedding and pressure from global reinsurers that require Santam to reduce its exposure to business interruption claims arising from failure of public utilities and public telecommunications has led to the insurer implementing a general electricity grid failure exclusion on all policies,” it said.

Power crisis makes for a ‘difficult insurance market’

Although industry experts have repeatedly said a complete collapse of South Africa’s grid is unlikely, the worsening state of the country’s energy crisis is in part making it a difficult insurance market, Ryan Woolley, CEO of Insurance Claims Africa, tells Moneyweb.

With three ‘black swan’ events – the Covid-19 pandemic, the KwaZulu-Natal and Gauteng riots of July 2021, and the floods in KwaZulu-Natal last year – reinsurers have grown cautious of South Africa, says Woolley.

South Africa has experienced load shedding every day for the past three months, with Eskom implementing the continuous rolling power outages to prevent the grid from collapsing while it overhauls its aged coal plants and other infrastructure.

Read: SA nears an ignoble record: 100 days of load shedding

For short-term insurers the sharp increase in rolling power outages has moved in tandem with soaring claims for power-related damage.

According to data from BetterSure, claims related to power surges shot up by 250% in 2022, relative to the previous year, while theft-related claims increased by 17% for the same period.

Read:
SA faces two more years of power outages, Eskom says
Mantashe sees low appetite for private power
Consumers urged to proactively mitigate load shedding risks

Load shedding is not the same as a complete collapse of the grid, and is in itself not viewed as an uninsurable event by the industry.

In addition, the effects of a complete grid collapse will likely still be covered by most insurers.

“The sharper end of that might be that if a fire is caused by a grid failure, are we looking at that being excluded? That would be unlikely,” says Woolley.

“A fire would be a separate intervening cause – the fire would still be covered and the losses that flow from that [would still be] insured.”

Woolley says there is however a mismatch in increasing both exclusions and premiums, saying that ideally insurers should decrease premiums if cover reduces.

“If you are going to reduce the cover, you should then, in some way, have a similar reduction in the premium.”