Several South African insurance companies, including Hollard, Momentum, Outsurance and Santam, have announced they won’t be covering damages related to the failure of Eskom’s power grid. The companies made this decision after reinsurers – firms that provide financial protection to insurance companies – indicated they would not provide coverage in the event of a grid failure, leading insurance companies to consider it an “uninsurable event.” The companies have seen a significant increase in claims for damages to goods due to Eskom’s load-shedding. Load-shedding is different from a grid failure and generally, insurance companies pay out claims if a customer’s equipment is damaged due to a power surge.
By Hanno Labuschagne
Several big South African insurance companies won’t cover their customers for certain damages related to the failure of Eskom’s power grid.
Moneyweb first reported on the development after seeing an email that Hollard Insurance sent to clients notifying them of a new “Electricity Grid Failure” exclusion added to their policies.
Hollard spokesperson Warwick Bloom said that although a total grid failure remained unlikely, it was now a “possibility”.
Bloom said reinsurers — the firms that provide financial protection to insurance companies — have indicated they would not offer reinsurance cover in the event of a grid failure.
“This means that electricity grid failure — as defined in our letter to our clients — is an uninsurable event,” Bloom said.
“Along with other insurers, Hollard is attempting to make this clear for policyholders.”
Following this change to Hollard’s policy, MyBroadband contacted insurers to find out whether they were also introducing changes to account for total grid failure.
Momentum Insure chief actuary Rudolf Britz said the company did not cover grid failure itself, but the impact of grid failure continued to be covered.
“For example, if your car is insured through Momentum Insure, and an accident is caused due to a traffic light that is not working due to a blackout, your cover remains intact,” Britz stated.
“However, if your business does not survive due to a total blackout, it will not be covered.”
Two other insurers who plan to stop providing cover in the case of a grid failure are Santam and Outsurance.
During the presentation of its financial results for the six months ending June 2022, Santam said it would implement a general electricity grid failure exclusion on all policies from 1 April 2023.
Santam personal underwriting head Attie Blaauw told MyBroadband the insurer wanted to create clarity for clients and brokers on what it could and could not cover.
“We continue to experience great pressure from our reinsurance providers to limit any exposure to systemic events,” said Blaauw said.
“In addition, given the frequency and severity of load-shedding, the change in risk of a potential grid failure cannot be ignored.”
Outsurance has also told MyBroadband it was reviewing its product wording to ensure there was no ambiguity about the fact that it would discontinue cover in the case of a grid failure.
“It is not possible for an insurer to cover a complete grid failure and the associated losses,” Outsurance said.
“The accumulation of these losses is not something that can be priced for as part of an insurance product or sufficient capital held to cover such a loss — as such it is an uninsurable loss.”
Naked Insurance’s co-founder Ernest North said that since many reinsurers had indicated they would not provide reinsurance cover for grid failure, it seems it makes for an uninsurable event that is likely to be excluded by all insurers in the future.
Big surges in load-shedding claims
Momentum, Naked, Outsurance, and Santam have seen significant increases in insurance claims for damages to goods due to load-shedding.
It is important to understand that load-shedding differs from a grid failure, otherwise referred to as a “blackout”.
Load-shedding is a controlled process during which Eskom’s System Operator instructs the utility’s customers — municipalities and direct — to turn off power supply to certain areas on a scheduled basis.
Load-shedding itself is not an insurable event, but an effect might be that an electricity user suffers damage to plugged-in equipment due to a power surge that can occur when electricity in their area comes back on.
Eskom has warned customers to unplug electronic appliances during load-shedding to avoid this. Still, insurers generally pay out claims if a customer’s equipment gets damaged due to a power surge.
In some cases, this eventuality is covered by default in a home insurance product, but some insurers require that it be taken out as an add-on.
This will likely continue, but policyholders must also ensure that their maximum covered limit keeps up with the value of their electronics to avoid being under-insured.
Outsurance is one of the insurers who has acknowledged it had to implement a higher excess on these claims to keep overall premiums affordable.
It further advises that customers install surge protection devices on appliances or main distribution boards to protect against damage.
“These solutions are very affordable and effective,” Outsurance said.
What happens during a grid failure
A grid failure occurs when there is more electricity demand on a network than available supply, which load-shedding has helped to avoid for years.
When demand exceeds supply, it will cause an imbalance in the system, resulting in the grid operating at a lower frequency than what it is designed for.
Under normal circumstances, the grid’s frequency should remain between 49Hz and 50.1Hz.
Eskom’s National Control Manager, Gavin Hurford, previously explained that a drop below 47.5Hz would be chaotic, with Eskom’s power generators automatically tripping to protect themselves.
This would cause a cascading effect where less and less capacity is available to supply demand, and the frequency plunges further, which could cause damage to transformers and other electrical equipment.
It appears that damage due to power surges leading up to a total blackout, when the frequency is volatile, is unaffected by the grid failure exclusion.
Santum’s Blauww explained to MyBroadband that the exclusion refers to when there is zero power supply.
“Power surge cover is something different, and we continue to offer this to our clients,” he said.
Momentum’s Britz concurred with this view.
“Operating at higher or lower frequencies is usually described as a power surge,” said Britz. “If the policy includes cover for power surges, this would still be included.”
“A good example of a claim due to grid failure is deterioration of refrigerated or frozen contents that may go bad due to lack of power over a long period of time, or if clients cannot earn an income due to the blackout,” said Britz.
“However, if a fire happens and the fire prevention equipment fails due to the blackout, for example, Momentum Insure cover applies.”
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