The National Treasury is looking to short-term insurers to step in to provide cover for public infrastructure that could be damaged or destroyed as a result of natural disasters.
Most public infrastructure remains uninsured, placing a large contingent liability on the government and the Treasury plans to explore public private partnerships to insure critical infrastructure.
With climate change bringing with it the increased risk of flooding, earthquakes, drought and fires, the need to address the insurance cover for public infrastructure held by municipalities has become urgent.
A recent example of the cost was the preliminary estimate of the R5.2bn damage to public infrastructure due to the floods in the Eastern Cape in June.
State-owned special risks insurer Sasria is also looking into the possibility of covering climate change risks.
As a World Bank commissioned study on disaster risk financing and insurance programmes by SA municipalities noted: “SA is increasingly exposed to severe natural disasters. Disaster relief costs amount to an average of R3.7bn per year, with 86% of losses uninsured. Municipalities are at the forefront of dealing with the effect of disasters.”
The study surveyed municipalities’ experience of managing disaster risk.
However the study — released by the Treasury on Friday — noted that only in limited cases did municipalities use insurance to cover some disaster costs, mostly for vehicles and buildings and to a limited degree infrastructure. No financial instruments were available for a severe, urgent event.
The Treasury is working on a disaster risk mitigation strategy with the World Bank and highlights in another document on its disaster risk strategy released on Friday that “the cost of disasters both climate-related and other has risen significantly over the past several years. Between 1952 and 2019 SA suffered economic losses from natural disasters amounting to R172bn with a substantial portion absorbed by the fiscus”.
It noted municipalities often financed disasters through the reprioritisation of money taken from essential services such as education, health and safety which was unsustainable. Alternative financial sources beyond the fiscus such as a contingency fund and risk transfer through sovereign and private insurance would be investigated.
The Treasury, along with municipalities, is planning a pilot study to determine the structure and pricing of potential insurance products for disasters by the end of the third quarter of 2025.
The government will engage with insurers on the potential for insurance, particularly parametric insurance, which is index-based insurance that pays out when an adverse event (such as a flood) occurs. The Treasury said in a statement this form of insurance was increasingly used by governments, municipalities and households to insure against climate-related risk.
It is envisaged metros with more potential exposure to flood risks would be considered first for this parametric insurance. A detailed assessment will be made in conjunction with the World Bank on the viability of this form of insurance for selected metros.
The Treasury said some large municipalities, such as Cape Town and eThekwini, had municipal insurance pools but the amount of cover offered tended to be limited due to poor data quality and poor asset maintenance records.
Municipal insurance databases needed to be updated to ensure an accurate record of insured assets.
“There is a significant opportunity to build on these facilities to increase asset cover and expand cover to important public infrastructure. The non-life insurance markets in SA present a viable opportunity to better manage risk by transferring key risks off budget,” it said.
The Treasury surveyed 40 municipalities at highest risk of natural disasters over financial years 2022/23 and 2023/24 and found there were significant delays in their accessing disaster response funds (an average of five months delay) and recovery grants (an average delay of 12.25 months).
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