The past three years have seen many South African industries buckle under the mounting pressures ushered in by a ‘black swan’ series of events. As the phrase used to describe an unpredictable event of unforeseen magnitude, this ‘black swan’ materialised in 2020 as the onset of the COVID-19 pandemic, followed by the beginning of the Russia-Ukraine war just two years later. The operating environment for businesses has been further impacted by South Africa’s deteriorating energy crisis, which is expected to continue well into the future.

The global perspective on emerging risks

Providing context on why the impact of these unexpected events has been felt so acutely by businesses on the ground is Jurgen Hellweg, CEO of commercial insurer, Western National. As he explains: “The threat to local business continuity has come from both internal and external sources. The pandemic alerted insurers to the importance of underwriting for pandemic-related risks and adjusting their policy options as well as coverage to ensure long-term viability.

Within a broader, more global context, the Russia-Ukraine war has disrupted supply chains across multiple sectors. For insurers, the effect of these disruptions has been most evident on the local motor claims segment, with insurers being unable to source replacement parts for various types of commercial vehicles. These are just two of the many factors that have been compounded by an environment where high inflation has led to the rising cost of insurance and claims.”

Disruption has also come from large-scale digital transformation and rapid technological development. The insurance sector, in particular, is being disrupted by the influx of insuretech innovations and the launch of new services and products such as usage-based insurance and pay-as-you-go policies. Developments such as these have compelled traditional insurers to improve on the innovation front, in order to maintain a competitive edge.

Unfortunately, however, along with this shift towards digital service provision, risks related to cybercrime have increased exponentially. With a high number of South African businesses falling victim to data breaches, phishing attacks and the theft of sensitive information, insurers have been forced to adapt. They’ve had to strike the delicate balance between providing a comprehensive service that covers all emerging risks and ensuring that their business models are poised to absorb these risks and remain financially viable.

The real cost of South Africa’s energy crisis

Focusing on the most pivotal changes in the local risk climate, Hellweg points to the ongoing and worsening energy crisis as the most immediate threat to businesses.

As he explains: “Loss of income, due to decreased productivity and business interruption, has been the most tangible impact of escalating blackouts, but the accumulative cost involves several other key factors.

In addition to loss of turnover, long-term damage to property and electrical systems, as well as stock losses of perishable goods, present an enormous challenge for many South African businesses. Sectors such as manufacturing, retail and hospitality bear the brunt of the energy crisis, with many of these businesses being forced to absorb the cost with little prospect of recovering their losses.”

Commercial insurance and grid failure exclusions

Those businesses who have invested in adequate insurance for losses related to power outages may have found some reprieve from the potential financial impact. In the current hard market in insurance, characterised by stricter underwriting policies and higher premiums, it is vital for businesses to take out the appropriate cover and implement contingency plans to manage energy-related risks.”

One of the greatest repercussions of the energy crisis has resulted in the limiting of options for businesses in search of ways to access cover for energy-specific losses. Losses resulting from lack of power supply are no longer seen as “unforeseen”, a fundamental principal of insurance, and as such the industry has moved to limiting the exposure related to a Grid Failure event on various levels by excluding this cover from their policy, it becomes extremely important for the commercial client to consider alternate supply measures to ensure the continuation of their business practices should such an incident occur.  

With loadshedding expected to worsen over the coming winter months, the impending threat of grid collapse has become a frightening possibility – one for which businesses need to be appropriately prepared.

For this reason, Hellweg encourages businesses to review their commercial insurance policies and ensure that they have a clear understanding of the policy wording, as well as any exclusions which may apply to their cover.

Proactivity and reactivity – a dual approach to managing risk

For many businesses, a robust risk management strategy may warrant taking on an additional level of cover and implementing further measures to curb the impact of loadshedding. Commercial short-term insurance and strong risk mitigation strategies will continue to be the most effective ways of buffering a business against financial loss.

Considering the multitude of elements impacting clients today it's important for businesses to see commercial insurance as a bespoke service offering, rather than a blanket response to risk. By working closely with advisers, businesses can ensure that their insurance policies are tailored to reflect their unique risk profile and take factors such as affordability into consideration.

As Hellweg concludes, “Insurance policies provide the contractual foundation for managing risk, but insurance advisers provide the much-needed manpower to provide businesses with ongoing support and advice. Not only can advisers provide in-depth knowledge on which insurance products best suit particular businesses and industries, but they are also extremely valuable resources for helping businesses maintain their operations when disaster strikes. Advisers should therefore be seen as agents for business support and valuable stakeholders, rather than external parties.”

Written by Jurgen Hellweg, CEO of commercial insurer, Western National