The South African non-life insurance market is abuzz with news and opinions following the introduction by insurers of so-called grid failure exclusions during the first half of 2023. Most, if not all, of the country’s main insurers had already taken steps to limit their exposures to electricity supply related claims by introducing higher excesses or outright exclusions on power surge claims over 2022; but their latest intervention is of far greater consequence. On advice from, or perhaps at the behest of, their reinsurance partners they have decided to introduce national grid failure exclusions to commercial and personal lines contracts.
Is this an overreaction?
Grid failure was among the talking points during a fast-paced webinar delivered by WP Pienaar, Head: Premier at Old Mutual Insure to #InsureTalk32 recently. In fact, Pienaar deserves applause for working the phrases ‘hot works’; ‘national grid failure’; and ‘policy wordings’ into a single 45-minute window. The presentation set out to answer whether the various non-life insurance exclusions doing the rounds circa 2023 were necessary or an overreaction by overly cautious insurers and reinsurers. To begin, Pienaar used diagrams of South Africa’s electricity distribution and generation infrastructure to illustrate how vulnerable the country’s energy supply is.
“We have an integrated power supply and power distribution network with around 95% of our power generating capacity based in the northern provinces; if something serious happens to the coal-fired infrastructure in the North, the entire country goes down,” he said. Unfortunately, it is impossible for South Africa to immediately avail of the impressive solar power potential of the Northern Cape due to inadequate distribution infrastructure. To make matters worse, the country relies almost entirely on gas-fired or pumped-storage peaking plants to help it through periods during which coal-fired electricity is in short supply. PS, Eskom distinguishes between scheduled or unscheduled maintenance, whereas the common people refer to scheduled maintenance or breakdowns.
There are two concepts that you must understand before digging into insurers’ and reinsurers’ responses to the country’s current power supply crisis. The first, loadshedding, is described by our ailing power utility as “a controlled process that responds to unplanned events in order to protect the electricity power system from a total blackout”. The second, blackout, is defined as “an event that occurs when there is too much electricity demand and too little supply, bringing the power system into an imbalance and consequently tripping the power system in its entirety”. Explained differently, Eskom implements different levels or stages of loadshedding to prevent tripping the power system in its entirety and causing a national blackout.
Could you survive two weeks without electricity?
“A blackout means everything trips and there is no power … and according to Eskom, repairing and restoring South Africa’s power grid following a blackout will take up to two weeks,” explained Pienaar. He shared details of significant grid collapses elsewhere in the world, including 230 million people in Pakistan being left without power for around 24-hours earlier this year. For a more extreme example, consider the 1999 lightning strike that knocked out large section of Brazil’s electricity grid; it took just over three months to fully stabilise the grid with up to 97 million people without power for extended periods of time. The bottom line is that local businesses and households will have to endure widespread loadshedding for the next two or so years to avoid the much bigger evil of a national grid failure. Non-life insurers were left with little choice but to implement grid failure exclusions because the resulting losses would be too widespread.
It turns out, however, that the potential for grid failure is not the only power-related risk that non-life insurers need to adjust for. Case in point, underwriters need to respond to the massive uptick in demand for commercial and household solar installations which introduce myriad challenges and opportunities for brokers and insurers alike. At a minimum, underwriters are exposed to greater property damage and loss claims due to a higher risk of fire; the possibility of solar panels being damaged by hail or extreme weather; and the rising incidences of theft of batteries and inverters.
Pienaar said that insureds must use accredited, certified solar installers; and ensure that power surge and earthing and bonding are addressed. The installer should provide you with a certificate of compliance (COC) in terms of the current legislation, with solar-specific guidelines still pending. Those who go the LPG gas route should also ensure that their gas installations are to spec. And finally, he warned against back-feeding diesel or petrol generators directly into a plug point.
The smallest spark could spell catastrophe
Turning to ‘hot works’, the presenter reminded the non-life brokers and risk managers on the call of the risks inherent in all processes that involve burning welding and other hot work. He referenced somewhat dated statistics from the NFPA in the United States which showed around 4600 structural fires each year caused by arc cutting; soldering, welding or other hot work activities. “If you have a client that deals with hot work in specific areas, as long as they keep the hot work in those areas, they will not need to issue a hot work permit,” said Pienaar, as he set out to bust some myths in the process. A second myth, easily dispelled, is that insures did not require office-based clients to operate a hot works permit system. In fact, fires consequent hot works are as common in the office environment as in industrial or manufacturing settings.
Insurers came in for some criticism for the ‘stickiness’ of their policy wordings. Case in point, many contingent business interruption (CBI) clauses that were formulated in the mid-1960s remained more-or-less unaltered when the COVID-19 pandemic occurred in 2020-2021. “The industry tends to stick with policy wordings; we expand on them from time to time without giving much thought as to the impact of these changes on exposures,” Pienaar said. Case in point, over time insurers increased the geographic areas on cover in the CBI sections of a policy at extremely low premiums. The industry does not stop to consider the impact of the cover that it provides!
No power, no petrol … think about it
To close, Pienaar shared a chilling example of the unexpected consequence of a national grid failure. It turns out that South Africa relies on just two Single Buoy Mooring (SBM) points for the bulk of its refined fuel supply. “To get fuel from the Durban SBM up to Gauteng we rely on a Transnet pipeline and a series electrical pumps … if we suffer a national grid failure, we will soon be unable to meet our inland fuel needs,” he concluded. “As an industry, we need to think about the cover that we provide our clients and understand both the exposure and the potential downstream impact if something goes wrong”.
Source: FA News