ReinsuranceRisk Management

The state of the riot wrap market in South Africa

Cameron Cupido, CEO Reinsurance Solutions Intermediary South Africa

There has been a marked increase in demand for political violence and terrorism cover (PVT) from South African commercial clients following the riots and looting that rocked KwaZulu-Natal and Gauteng in July 2021. However, recent amendments by the state-owned South African Special Risks Insurance Association (Sasria) – the country’s sole political riot insurer – have left a gaping hole in the cover available, forcing insurers to look to reinsurers and their brokers to place this business.

There are four main insurance pillars in the PVT market, namely terrorism and sabotage (S&T); strike, riot and civil commotion (SRCC); political violence; and war, including civil war. Sasria is the only insurer in the country providing cover for damage caused during politically motivated riots or civil commotion (although not for war or civil war).

Previously, Sasria extended its primary R500 million loss limit to allow for clients to purchase Excess of Loss cover up to a combined limit of R1 billion above the primary coupon (R1.5 billion combined) with regards to Material Damage, Standing Charges/Working Expenses, and Contract Works. This was done in partnership with its reinsurers in the London market.

However, in March 2022, Sasria reversed this decision. In a statement to its agents and intermediaries it said that following discussions with reinsurers, it had become clear that there was ‘no longer an appetite’ from its partners to continue with this facility. As a result, from 1 April 2022, Sasria would no longer offer cover for Excess of Loss.

Policies renewable in, and new business incepting, March 2022 where terms had already been requested from Sasria and quotations provided, would be covered for a period of one year. New and renewing policies commencing 1 March 2002, or after 1 April 2022, where terms had not been requested and cover not confirmed, would not be covered.

Pressure on PVT reinsurers

Historically, South Africa has been one of the most competitively priced territories for PVT cover in the world. However, the years of rate erosion meant that pricing had become unsustainable. Then the July 2021 riots happened – bringing with them the largest PVT losses from a single event ever to have come out of Africa. Many reinsurers were negatively affected by the riots, resulting in a number of reinsurers pulling out of the South African PVT market.

In most cases, the reinsurer’s risk associated with PVT in a particular country is driven by security analysts’ forecasts. These companies pool information and rate each country for various risks such as terrorism, unrest and war. 

Compared to other continents, Africa has statistically seen more political instability over the past few decades than other continents. This, combined with the risk of terrorism emanating from well-established regions occupied by terror groups, along with the risk of unrest in countries with poor economic outlooks, unfortunately makes profitably writing PVT in Africa harder than in other continents.

This is sometimes complicated by the absence of underwriters on the ground in these countries. However, in such cases, the best minds in security analytics are employed to be their ‘feet on the ground’, and provide an objective view of the risk.

Beyond the public-facing retail businesses that might be at risk of political violence, riots and civil unrest, there exists an entire world of commercial clients in the bustling CBDs of Africa’s busiest cities hosting blue-chip multinational companies in secure business parks. 

There are some countries in Europe where it is easier to place PVT cover than in Africa, like Switzerland, Austria and Spain. However, there is currently limited to zero appetite for risks in countries that share borders with Ukraine, for fears war could spill over into those countries.

Conversely, it’s easier to place business in some African countries than certain European countries. For example, we are currently battling to secure reinsurance support for a chain of shopping malls in France. If the risk was in Botswana, Ghana or Senegal, we would have it placed by now. France has a well-known history of damage to retail infrastructure as a result of previous riots, and there is presently increased potential for political unrest following Macron’s re-election. Reinsurers are understandably hesitant to cover retail in France as a result. 

This speaks to the reluctance by reinsurers to cover retail in South Africa, which has suffered similar losses due to rioting.

An opportunity for local insurers

Given that there is a strong demand for political violence and terrorism insurance in the South African market, this move by Sasria presents local insurers with a good opportunity to offer such cover to their commercial clients. The key to successfully placing and covering this business is through securing robust reinsurance cover by partnering with capable reinsurance brokers.

Reinsurance brokers who understand the local market can identify the most critical issues and provide context and sound reasoning to the preferred international reinsurers to secure the right cover. This rings true for retail clients too. Although this business is more difficult to cover, it’s not impossible, and is generally placed on a risk-by-risk basis. 

Sasria’s changes to its Excess of Loss cover follow previous cover amendments in October 2021. Then, Revenue cover was moved from the Material damage coupon to a new Revenue basis of cover under the Business Interruption coupon. 

In addition, a new rating class for municipal-related risk was created, and a new rating structure for F2 (Fire commercial – Office), taking into account the lower level of risk for commercial office risks. This was directly connected to the outcomes of the July riots, where commercial property (excluding Office) was among the hardest hit in terms of the severity of the claims received.

Sasria was previously quoted as saying that the most claims received in terms of number and rand value related to fire commercial, followed by heavy commercial vehicles, light commercial vehicles, and business interruption.

It’s important to note that Sasria’s Business Interruption (BI) cover only includes gross profit, working expenses or standing charges, and net profit. It doesn’t extend to include traditional contingent business interruption covers, such as loss of income following damage to premises of customers and suppliers, and to the supply of utilities like electricity and water.

PVT market hardens

While demand for PVT products in South Africa is increasing, the risk for reinsurers operating in this space is also increasing. The market is experiencing its first real hardening following a year of losses, with a notable increase in both frequency and severity compared to recent years. The impact has been widespread with a number of well-respected terrorism reinsurers struggling to renew their own PVT treaties that allow them to write this class of business. This reduction in treaty capacity has had a knock-on effect, and is directly reducing capacity in the PVT market. 

This comes after notable claims in both South Africa and Ukraine, where long lists of reinsurers have been automatically bound following the decision of a single underwriter – often leaving them with no right to decline.

That being said, there are still reinsurers looking to grow. They are underwriting on a case-by-case basis, and not excluding any asset type or any country, and are certainly not applying blanket rate increases across the board. 

It is more crucial now than ever that insurers use trusted reinsurance brokers that will keep them well informed, and ensure their businesses are being directed to the right reinsurer for the right results.

Our London office specialises in placing PVT business emanating from Africa and the Indian Ocean Islands, and has a combined experience of more than 25 years in this class of business. 

Look for a reinsurer that understands the African market

The July riots hit South Africa hard. The total quantum of all combined claims was R33.833 billion. Sasria paid out more than R17.190 billion in just over six months. By November 2021, 80% of all claims under R30 million had been settled, with Sasria intending to have paid R27 billion of the R33 billion by the end of March 2022. 

While the Sasria coupon is expected to remain at the heart of PVT cover in South Africa, the role of private reinsurers that specialise in this cover and provide tailored PVT policies is more relevant now than ever before. These policies can be bought by insurers alongside their Sasria coupon and/or in excess of the coupon.

Establishing a relationship with a local reinsurance broker that understands the South African market and that also has strong links to international reinsurers is critical. Reinsurance Solutions Intermediary Services has both the cover and the capacity to meet PVT demand in South Africa and the rest of the Southern African region.

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