A man washes mud off his hands in the flooded parking lot of a convenience store as he cleans up the damage from Hurricane Irma in Everglades City, Florida. (AP Photo/David Goldman)

If you are a regular DStv viewer, you will probably have seen the insert featuring a graphic of Chuck Norris getting zapped by lightning, explaining why your picture quality may be negatively affected by weather events on the other side of the world.

The same thing applies in short-term insurance: how much you pay in premiums for home and vehicle cover is influenced by events in other regions of the globe. And the bad news is that there has been a dramatic rise in both the severity and frequency of extreme natural events in recent years, which scientists attribute to global warming.

Nico Conradie, the chief executive of reinsurance company Munich Re Africa, in a presentation to delegates at the PSG Conference 2018 last week, said that last year, 2017, had been a particularly bad year for the industry, and was “the year that reinsurers would prefer to forget”.

Before looking at the catastrophic events of 2017, let’s consider why events occurring far from our shores should affect us locally.

It’s because of something called reinsurance. Reinsurers, Conradie says, insure insurance companies. Just as you pay premiums to your insurance company to protect against risks to your property, so insurance companies pay reinsurers for protection in cases where their own reserves are inadequate to cover large-scale payouts, typically after a major disaster.

Reinsurance, Conradie says, is all about identifying, understanding and pricing risk, and it is by nature a global business.

Thus, a farmer in the Free State will be affected by an earthquake in Peru, just as the global market will be very slightly affected by an event affecting the farmer. Conradie says: “A part of the premium the farmer pays on an agricultural policy, for example, lands with insurance companies all around the world – his risk is atomised and shared by 200 or 300 players. If a loss occurs, say, from a hailstorm damaging the farmer’s crops, each of those players contributes in a small way to his compensation.

“On the other hand, if there is a big event elsewhere in the world, the farmer is not insulated, and the subsequent price changes will affect his premiums. Once local insurers are locked in to the global market, their policyholders cannot be insulated from this market.”

Climate change

Conradie says his company is of the view that the climate certainly is changing, drawing on the Munich Re Group's own data of over 138 years and other studies. He says 2013 to 2017 were were the warmest five years in recorded history, and 2017 was the warmest non-El-Niño year.

“We see greenhouse gas concentrations increasing, sea levels continuing to rise, with global ocean heat content at record highs. We see how the Arctic and Antarctic ice packs continue to diminish, and the ongoing acidification of the oceans. The data speaks for itself that climate change is happening.”

He says the year 2017 illustrates how the changing climate and ensuing increase in natural disasters affects reinsurers.

Something no reinsurer ever wants to see, Conradie says, is a large hurricane bearing down on the Florida coast. However, the probability of such event happening is factored in to a reinsurer’s risk models, and the amount of damage can be determined to a relatively high degree of certainty.

“We can also determine risk based on the probability of a second hurricane following the first,” Conradie says, “but our model never predicted three such occurrences (hurricanes Harvey, Irma and Maria), in the space of one month.”

In August and September 2017, the three hurricanes followed in quick succession, each causing massive damage and loss of life:

  • Harvey (August 25): $100 billion insured damage, 88 deaths;
  • Irma (a week and a half later): $60 billion insured damage, 128 deaths; and
  • Maria (September 19): $70 billion insured damage; 108 deaths.

“Reinsurers had never seen anything like that,” Conradie says. The whole industry suffered and some companies went out of business.

But the three hurricanes weren’t all reinsurers had to deal with last year. Two massive earthquakes in Mexico and Guatemala within two weeks in September caused damage of $8.3 billion (of which $2.4 billion was insured) and 467 fatalities.

To add to the industry’s woes, there were heavy storms and flooding in Central Europe in November.

Here in South Africa, Conradie says, we had one of the biggest thunderstorm cells to ever occur over Johannesburg. It was so big it caused damage in both Gauteng and Durban on the same day.

But far more spectacular, he says, was what happened in Knysna. The prolonged period of drought in the Western Cape, followed by thunderstorms combined with extreme winds, resulted in the widespread, devastating fires in the Knysna area in June. “That was something no amount of modelling could predict.”

Conradie says reinsurers are particularly worried about global warming causing worsening drought conditions in Africa, which brings increased fire risk.