Dineo calls for Reassessment of Reinsurance Structuring and Wording

The recent tropical cyclone, Dineo, which hit several southern African countries in February 2017 has significant impact on insurance and reinsurance financial results for 2017, and also most likely, 2018. Dineo is likely to have the greatest insurance loss impact in Mozambique, with moderate impact in South Africa, Zimbabwe and Botswana. The cyclone is also expected to hit Namibia later today, although it will have minimal impact on loss since it has lost strength.

According to preliminary estimates from MakCat® (Maksure Risk Solutions proprietary catastrophe model) the insurance losses are predicated to be USD53 million across the region. Mozambique is likely to have the largest portion of losses as the cyclone’s landfall was heavy in Inhambane and Vilanculos, the prime tourist resorts in southern Mozambique. In Zimbabwe, the insurance losses are expected to be moderate, given the low insurance penetration in the rural southern districts (Gwanda, Bulilima, Mberengwa, Tsholotsho and Insiza) of Zimbabwe. In South Africa and Botswana, the cyclone has been downgraded to a tropical depression after losing energy and intensity. The insurance losses will emanate from excessive rains and subsequent flooding risk. The final insurance losses are expected to be fully quantified and recorded by 2018.

Dineo has some practical lessons in terms of reinsurance buying behaviour especially for insurance and reinsurance companies that are expanding into the rest of Africa. A typical challenge for insurers purchasing regional and/or global reinsurance programmes will be how to align the terms of coverage to incorporate a catastrophic loss such as Dineo that spans across different territories over a considerable number of days or weeks. Such events call for the redefinition of an insured event under reinsurance agreements, especially in recent times where scientific progress has made it possible to determine natural events without relying on traditional hours’ clauses. The hours’ clause has become obsolete. The application of the hours’ clause has interpretation challenges and often prejudices the reinsured as cover may cut off in the middle of an event.

Some more practical challenges aligned to regional or global reinsurance programmes include:

  • Do we need to aggregate losses across different territories?
  • Given the time lag for an event between development and ultimate dissipation, such as in the case of Dineo, is the hours’ clause a proper risk management tool for the reinsured?

Given that scientific progress now enables risk carriers and reinsurance brokers to identify and determine natural events, we need to remodel event definition from the traditional hours’ clause to a more accurate atmospheric disturbance clause. This will enable insurers with regional and global reinsurance programmes to have adequate cover in such cases as Dineo.

At Maksure Risk Solutions, we strongly believe that we need to create more certainty and clarity in the structuring and construction of reinsurance wordings to cater for insurer development and expansion into Africa. We need to continue looking and remodelling catastrophe losses and programmes at a regional level.