Possible power grid failure a real risk for insurers

During April we celebrated Earth Day and our President, Mr Cyril Ramaphosa, joined some more than 40 world leaders at a climate summit convened by US President, Mr Joe Biden, to discuss the global climate change effort in the run-up to the next international climate conference taking place in Glasgow, Scotland in November 2021. Reporting back, the President stated that indeed there was a common appreciation at the summit that there was a need for the international community to dramatically scale-up efforts, raise levels of ambition, and support other developing countries with the means to implement climate actions. 
 
Tackling climate change is not only a national priority for South Africa but stretches way beyond our borders. The impact of climate change on the sustainability of commercial and subsistence farming has been immense globally. Even though the coming of the rains in 2020 broke a seven-year drought streak, it caused a lot of damage to infrastructure, widespread crop failure and negatively impacted several farming activities. The non-life insurance industry is impacted badly by these sudden changes in weather patterns that destroys crops and infrastructure due to excessive rainfalls, while prolonged dry spells that usher drought periods have also never been good for any nation with an economy to run.  
 
Indeed, SAIA members and their African counterparts in the non-life insurance and reinsurance space have a key role to play in promoting economic, social, and environmental sustainability - in other words, sustainable development. It is in this spirit that on 21 April 2021, SAIA, under the auspices of the United Nations Environment Programme’s Principles for Sustainable Insurance Initiative (PSI), also signed the Nairobi Declaration committing to support the achievement of the UN Sustainable Development Goals (SDGs).
 
In March 2021, the Council for Scientific and Industrial Research (CSIR) released an extremely interesting document titled Statistics of Utility-scale Power Generation in South Africa that quantifies electricity costs and the cost of load shedding for the whole of South Africa. The report shows that electricity production has dropped by 4.3% in the 10 years between 2010 and 2019, and by 8.8% between 2010 and 2020 resulting in annual average reductions of 0.5% (2010 and 2019) and 0.9% (2010 and 2020). It further points to 859 hours of load shedding in 2020, seemingly the most intense South Africa has experienced yet.
 
In 2020, the same report estimated that the total economic impact of load shedding in South Africa over the past 10 years could be as high as R338 billion. There is no doubt that South Africa urgently needs to secure additional power supply. South Africa faces a 4000-megawatt (MW) power shortfall, which was confirmed by Eskom in March 2021, adding that this will be case for the next 5 years.
 
This is one space that has been weighing on the minds of non-life insurers for many years, with renewed attention for the better part of the first quarter of 2021. As non-life insurers, it is our specialty and duty to strategically foresee future risks and possibly explore such possible challenges which may befall our fragile economy with all relevant stakeholders. Given our circumstances as South Africa, the possibility of a prolonged power grid failure is a significant risk that has not escaped our minds and discussions as non-life insurers. Whilst limited insurance cover is available for losses due to sporadic power outages and/or load shedding, grid failure is not an insurable risk. It is our hope that the non-life insurance industry and the relevant stakeholders will explore this space further in the coming months or years to map out the best possible way to handle it, should it occur.

This editorial was written by Ms. Viviene Pearson, Chief Executive of the South African Insurance Association (SAIA) for their April 2021 SAIA Bulletin.