Building resilience in South Africa’s political violence insurance market
While the political violence and terrorism market has abundant expertise for writing SRCC cover on a standalone basis, the withdrawal of capacity by a number of carriers has led to substantial rate increases for loss-affected territories
The riots in South Africa in July 2021 resulted in significant property damage that took a heavy toll on Sasria, the state-backed political violence insurer, and also spread into the international political violence markets. With national elections looming in 2024, could the political violence market cope with another potential outbreak of civil unrest?
The public unrest that erupted in South Africa in July 2021 came as a reaction to the imprisonment of former president Jacob Zuma for contempt of court after he refused to participate in a corruption inquiry.
In some of the worst rioting seen in the country since the end of apartheid in the early 1990s, Zuma supporters took to the streets in Zuma’s home province of KwaZulu-Natal, with the violence later spreading to Johannesburg.
Initial estimates of the likely insured loss to the state-backed political violence risk pool, the South Africa Special Risks Insurance Association (Sasria), rose from an estimated Rand7bn ($481m) to Rand10bn immediately following the riots to Rand33.8bn as of February 22, 2022. The insured losses had a sizeable impact on Sasria’s reserves and created a reset situation for the state insurer.
A modest proportion of those losses were reinsured in the international commercial political violence markets and, in the aftermath of this event (and in conjunction with riot losses in other countries), there was a contraction in market capacity, resulting in substantial rate increases and exclusions. The effect of this was seen within the strikes, riots and civil commotion (SRCC) excess-of-loss market and also within the standalone political violence market.
The SRCC conundrum
Coverage for SRCC risks is available as a standalone policy, but in many territories it has historically been included in some carriers’ all-risks property coverage. However, as events such as the unrest in Chile in 2019 and Colombia in 2021 have demonstrated, domestic and regional careers now typically seek to exclude SRCC coverage from their property all-risks policies, making it harder for insureds to cover their property exposures against future civil unrest.
While the political violence and terrorism market has abundant expertise for writing SRCC cover on a standalone basis, the withdrawal of capacity from the market by a number of carriers following the events of recent years has led to substantial rate increases for loss-affected territories.
Given the catastrophe exposure of SRCC, sufficient excess primary and reinsurance capacity is required to enable carriers not only to cover the scope of insured losses on a standalone basis, but also to continue supplying capacity to the market after a major loss event.
Following the events in South Africa, demand for political violence and terrorism cover has unsurprisingly increased and Sasria policies are likely to be heavily taken up. The risk pool’s primary exposure is increasing year-on-year, with Sasria coupons (a confirmation of coverage) now being purchased for combined property damage and business interruption, following the non-renewal of the excess coupon. This has made it more viable for the commercial market to provide an excess solution to South African SRCC risks.
Given the unprecedented number of claims to Sasria following the 2021 riots, the percentage of risks taken up by the private market on an excess basis is also likely to increase in future.
Despite the myriad factors with the potential to influence dynamics in the region, Arch’s appetite to write political violence risks remains strong and we are continuing to work with our brokers to provide bespoke solutions coupled with price adequacy.
The road ahead
It is reported South Africa’s next national election in April 2024 could result in a coalition parliament, rather than a clear majority for the ruling African National Congress (ANC) party. Despite coming under significant political pressure, South Africa’s president, Cyril Ramaphosa, has managed to consolidate his position as the head of the ANC and in the near future a key area of focus will be the electricity crisis that plagues the country.
Eskom, the state-owned power company and largest producer of electricity in the country, is struggling with its power demand forecasting and continues to operate a system of “load shedding” to balance supply and demand, placing a strain on business and infrastructure. These energy blackouts are expected to continue and will be a major issue running into next year’s elections.
Given the catastrophe exposure of SRCC, sufficient excess primary and reinsurance capacity is required to enable carriers not only to cover the scope of insured losses on a standalone basis, but also to continue supplying capacity to the market after a major loss event
South Africa is also contending with fuel supply issues for powering the national grid while, at the same time, one-fifth of the country’s power infrastructure is focused on energy transition, sparking significant investment in solar power projects as well as other sources of green energy. However, the interim period before this additional capacity comes online will remain challenging, with electricity prices anticipated to increase – on top of rising fuel prices and wider inflationary pressures.
Potential for unrest
The combination of the energy crisis, failing public services, the impact of inflation on the cost of living and the likelihood of a coalition government are likely to fuel some unrest following the election result. However, the scale of unrest is unlikely to be at the same level as 2021.
Loss scenarios are expected to be more limited as a result of president Ramaphosa’s strengthened control over the military. Any widespread unrest will be met with a more rapid and stringent response than before, particularly where it concerns the protection of core assets in an ongoing energy crisis.
Public feeling among citizens who did not take part in the 2021 riots was also heightened during and after the unrest. There are stories of taxi drivers and other members of the public blocking roads to stop looters entering the Sandton City shopping mall and other areas in Johannesburg. This behaviour was also seen in other South African cities as people sought to protect their homes, their towns and the infrastructure that supports communities.
However, the losses in more remote areas of the country raise some questions about the ability to rebuild communities in the wake of further damage. Continuous and periodic property damage and looting could lead to private companies withdrawing from some areas, causing a repeat of the severe shortages of basic food and other essentials that occurred following the 2021 riots.
Businesses will therefore be keen to secure coverage against any threat of property damage ahead of the elections, should civil unrest erupt once more. The international political violence and terrorism market should be ready to work with Sasria and domestic carriers as well as brokers to help insureds secure effective cover and build resilience into both the domestic political violence market and communities throughout South Africa.
Joseph James is terrorism, political violence and war underwriter at Arch Insurance International