Guiding clients through troubled waters

While the issue of climate change has been downplayed to some extent in South Africa, it is already having a major impact on people, including their ability to insure themselves against potential losses. As a result, it is essential that brokers begin familiarising themselves with the risks involved in order to ensure that the needs of their clients are adequately met.

 

An increase in the frequency and severity of extreme weather patterns combined with rapid urbanisation without sufficient drainage infrastructure has dramatically heightened the flood risks for certain regions in the country, such as the Southern Cape and along the West Coast.

 

While it may not be widely known amongst the general public, these factors have resulted in insurance companies often being unwilling to provide cover for, or even quote on, flood related risks in these regions.

 

A recent case in point of which I am aware is that of a new homeowner in the Breede River area in the Western Cape, who found that he was unable to obtain flood cover on his newly purchased R3-million property, as it stands in an area that is prone to flooding on a regular basis. Not only is he now exposed to significant risk, but the value of his property has been severely eroded.

 

This situation speaks directly to the relationship that should exist between broker and client. It is one whereby the client will not make any significant purchase before consulting with his broker to establish the nature and extent of any possible risks.

 

Had this client’s broker advised him to have a full and comprehensive risk assessment done of the property before purchasing, it would have highlighted these issues and he would have had the opportunity to walk away from, or re-negotiate, the deal.

 

This is not an isolated case. Increasingly, we are seeing that properties located in coastal areas or those near large rivers or dams are running similar risks. It is vital that all brokers operating in these kinds of locations explain the risks to their clients and insist on a flood assessment being done as a matter of necessity.

 

Insurance companies already have sophisticated processes and models that assess and measure flood risks and are more than happy to share this knowledge in order to educate their brokers on the risks that their clients could face. It is therefore crucial that brokers take the opportunity to request this information from insurers.

 

While some may dismiss those warning of climate change as “alarmists”, there is evidence to back up these claims. According to research commissioned last year by the Association of British Insurers, a 4°C rise in average global temperatures could increase the average annual insured loss caused by floods in Great Britain by 14% to £633 million. The report suggests that in order for insurers to comply with minimum capital requirements, insurers would need to add a further £1.9 billion to the £5.9 billion capital they currently hold to cover inland flood losses.

 

While South Africa – for which comparative figures are not yet available – has a more moderate climate and is somewhat protected from the extreme weather patterns seen in other parts of the world, we have certainly seen an increase in the frequency and severity of floods and storms in recent years such as those that battered False Bay in 2008.

 

A report recently published by Gregg Oelofse - environmental expert and Cape Town city’s head of environmental policy - on rising sea levels, suggested that the Mother City can expect even larger storms in the future, which will see even heavier amounts of rainfall, putting coastal areas at an even higher risk.

 

Oelofse’s report highlight areas that are already susceptible to a rise in sea levels include Camps Bay, Glencairn and the Strand beachfront. This suggests that the homeowners who are often most vulnerable to the impact of climate change appear to be at the top end of the market, such as owners of ocean front properties.

 

While debate about climate change and changing weather conditions may yet rumble on for a number of years, it is clear that for an increasing number of South Africans it is already becoming a harsh reality. I believe that brokers have a responsibility to guide their clients through these troubled waters.