Riot insurance in South Africa - the gap in protection for clients widens

South African businesses are facing ever-increasing operational costs, one example of which is the cost of riot cover for business – something no business can afford to be without.

The view that “it will never happen to me” is naïve at best, and irresponsible at worst, as indicated by the July 2021 KZN riots.

The current level of political uncertainty based on the backdrop of the KZN riots, and the ongoing social unrest driven by load shedding and the severe cost of living pressures in which most South Africans find themselves, has led to a significant increase in the cost of riot cover for businesses as well as restrictions in the limits of indemnity which can be purchased by clients to protect their businesses.

The consequences of the 2021 KZN riots are not easily ignored, and as President Ramaphosa stated to the Human Rights Commission in April 2022, with over R50 billion in resulting damage. In addition to the financial cost, 340 people sadly lost their lives and many people lost homes and jobs during the riots and the time shortly thereafter.

Confidence in the South African system and the social structures was severely undermined by these actions and there is now a reluctance and hesitancy on the part of insurers, both local and international, to commit capital to cover this line of business. This has serious long-term consequences for businesses who require insurance protection to position their businesses to expand using finance of any form, and regarding certainty in the financial veracity of their business.

On the local front SASRIA , the State-owned insurer, has reduced its coverage limits from R1,5bn for assets and business interruption to R500m. The reason given for the reduction (as per circular 517 on the SASRIA website) is the lack of appetite from its international partners to provide reinsurance protection. Before the KZN riots these same international partners (insurers and reinsurers) used to provide facilities, mostly out of London, to supplement SASRIA in the provision of added cover for Property Terrorism and Strikes (PTS). This PTS cover, amongst other things, provided coverage for contingent business interruption (for specific lines of coverage aligned to business interruption) following riot. It also allowed for top up of SASRIA limits enabling clients to have coverage for physical damage to assets, and contingent business interruption for higher limits than those provided by SASRIA.

Whilst clients can still obtain coverage for PTS, since many insurers have ceased to underwrite the risk due to the risk exceeding their appetite, the cost has become incrementally higher. Typically, clients must now pay many multiples for their PTS cover compared to what they paid before. Combined with the heavy increases in premiums, insurers have also applied many more exclusions and restrictions to the coverage provided. As such, it is now more important than ever to get professional advice on the cover that you buy, and the ramifications that it may have on your business.

The increase in PTS pricing also needs to be considered against the backdrop of a general rise in insurance premiums since 2019, so clients need to carefully consider which risks to insure or not. Many corporate clients are insuring their assets and business interruption risks at a higher policy loss limit (claims cap) of say R1bn which may apply to fire and major perils. A claim example in this class of insurance would be damage and resultant lost profits caused by accident such as electrical short circuit/spark, which would be covered up to R1bn. In the case of a SASRIA incident the client may have to rely on SASRIA for riot cover type fire claims (these are excluded in the Assets and Business Interruption Policy) with a limit of only R500m. Considering that fire by accident has no intentional malice and is purely inadvertent, not having the higher limits available for riot and strikes seems incongruent: during a riot, rioters tend to inflict as much damage as possible on businesses, in most cases damaging the key parts of the business operations in an organised fashion. If cost was not a factor, best practice is to ensure fire limits are matched or indeed possibly increased for damage caused by riot.

Another consideration when comparing SASRIA coverage to coverage given by commercial insurers for Assets All Risks and Business Interruption, is that SASRIA’s limits apply for the policy period whereas the Assets All Risks and Business Interruption insurance is usually on an each and every occurrence basis. In other words, one large claim matching or exceeding the limit erodes the annual policy for SASRIA, but this is not the case for Assets and Business Interruption All Risks Insurance, which limits each occurrence.

Clearly these coverage issues are complex and trying to work out which cover to buy without professional advice from a broker can lead to serious ramifications in the event of a claim. Hopefully, we will not be faced with similar instability and unrest in the future which will allow insurers to build up confidence in our social fabric once again.