With Government as SASRIA’s only shareholder, it will have to pay for the losses that may not be recoverable from independent reinsurers for claims arising from the recent widespread looting and arson. By implication, this means the South African taxpayer will once again have to foot the bill.
Unfortunately, as we have seen in the cases of most state-owned enterprises, the SASRIA cupboard is likely to prove to be bare once all claims are in. Indeed, once the dust settles, it is quite probable that SASRIA will be left technically insolvent. How did it come to this?
Before the Soweto riots in 1976, it was possible to insure against damage caused intentionally in terms of the Riot, Strike, and Malicious Damage (RSMD) extension to property policies sold by many South African Insurance Companies at that time. This extension provided very limited cover which in any event did not cover “civil commotion assuming the proportions of or amounting to a popular rising.” It is doubtful if any cover at all would have existed in terms of the normal cover provided by that extension for the unrest which took place recently in KwaZulu Natal.
At that time, Soweto had been administered by the Johannesburg City Council. The government decided to establish separate administration boards and Soweto was placed under the administration of the then newly established West Rand Administration Board. The insurances of public buildings and other assets in Soweto were then placed with Santam. Within days of Santam coming on risk, the riots broke out and lasted for some time causing considerable damage to property including schools, libraries, and post offices. It was not clear if this damage was covered by the existing polices and it was hoped that clarity would be gained once the Cilliers Commission, a commission appointed to investigate the riots, tabled its report. The commission took a long time to complete its investigation and once released did not resolve the questions of whether or not insurance did indeed cover the damage. Clearly, the existing RSMD extension was wholly inadequate when it came to dealing with damage caused by persons who are politically motivated.
The insurance industry, actively encouraged by the then Regulator being the Financial Institutions Office, decided to establish a non-profit making Section 21 company named the South African Special Risks Association (SASRIA), to underwrite risks emanating from politically motivated damage to property, including consequential losses (business interruption). SASRIA was structured on the basis of a “risk pool” to which many South African insurers subscribed Each participating company committed a fixed sum (R5 million) of capital to SASRIA and the liability of each company was limited to their capital commitments. If possible, reinsurance was to be arranged and the government was approached firstly, to grant tax exemption to SASRIA, which was not unreasonable since SASRIA was a non-profit making company and secondly, to act as SASRIA’s reinsurer of last resort. The government agreed to both requests.
To further limit SASRIA’s liability, it specified a maximum limit for any one insured person or entity, and not per loss, which at the time was a source of some contention. The Business Interruption did not insure loss of profits, the government being of the opinion it could not underwrite private sector profits. Thus, besides damage to assets, SASRIA insured only standing charges and increased cost of working.
Since SASRIA was in a sense a collective company owned by the industry, the industry did not want to establish an expensive administration system for this company. So, it was decided that most of the administration would be done by the existing conventional property insurance companies. The main policies, would be the existing conventional property policies. Each of these would henceforth contain a new exclusion clause, called the South African Insurance Association (SAIA) exclusion, excluding all claims for damage caused by persons who are politically motivated (including the usual war damage exclusion). These risks were henceforth to be borne by SASRIA, and only SASRIA. Uniquely, SASRIA could not cancel coverage nor could it refuse coverage.
SASRIA did not issue a separate policy, but provided a policy subordinate or supplemental to the conventional insurer’s policy. This policy was called a coupon policy and covered most of the risks excluded by the SAIA exclusion. In a sense then, the SAIA exclusion created a hole in the conventional underlying property damage policy, much of which was then filled by SASRIA’s coupon policy. To avoid any doubt as to whether the damage is caused by persons who are politically motivated or not and ensure that SASRIA would always be liable, the underlying conventional policy contained a reverse onus of proof requirement. If a loss occurs and it is not clear if it was caused by a person who was politically motivated or not, then the presumption is that the person is politically motivated and SASRIA becomes liable for the indemnification.
In the interests of simplicity and perhaps even equity, SASRIA premium rates were not risk rated and the same flat-rated premium applied throughout South Africa, irrespective of conditions prevailing at the risk location. Under these circumstances, the usual duty to disclose was fairly meaningless; as the same premium applies irrespective of the risk. However, it was possible to buy a measure of political unrest insurance coverage in other markets, such as the London market, often at lower rates than SASRIA’s. The public would purchase political unrest coverage in these markets when the risk was low. If unrest broke out these insurers could cancel coverage and the insureds would then obtain coverage from SASRIA, which it could not refuse. So, the problem of adverse or anti-selection arose. To overcome this problem, the Reinsurance of Damage and Losses Act 56 of 1989 was passed making it a criminal offence in South Africa to purchase political damage insurance from any insurer other than SASRIA. There is no obligation to purchase political damage insurance in South Africa, but if it is purchased it must first be offered to SASRIA. South Africa is thus one of the few countries in the world where the mere purchase of insurance can constitute a criminal offense. The SASRIA system of political unrest insurance, however, worked exceptionally well.
The premiums charged by SASRIA were initially excessive for the risks covered, so the premiums written quickly outpaced the claims resulting in a significant surplus. The South African government was never called upon in its role as reinsurer of last resort. It never had to pay a single claim, and after 1994 it was concluded that the funds being held in SASRIA would never again be required for the payment of claims. By this time, SASRIA had accumulated several billions of Rand as reserve capital. The new ANC government then decided to nationalise SASRIA in terms of the Conversion of SASRIA Act 134 of 1998 and once so nationalised, paid itself a huge dividend of around R10bn.
Stripped of its assets, the government then tried to sell SASRIA back to the industry, but there was not much enthusiasm for the purchase. In 2001, the government decided to hold on to SASRIA for a further period of five years and then to reconsider the matter. However, no further attempt has ever been made to return SASRIA to the private sector, and SASRIA itself has been at pains to present itself as a niche insurer in an open market, something which it really is not. Much like Eskom and the SA Post Office. it is instead a protected business with a legal mandate which allows it to monopolise an entire section of the South African short-term insurance market.
After the recent widespread unrest and looting, the main question arises of to what extent SASRIA is able to foot the bill for all this damage? The current SASRIA policy limits for F1 and F2 coupons are R500 million per client and R1 billion for the F3 coupon. The recent riots and looting have cost South Africa dearly – just in material damage, estimates range from R20bn to R50bn. However, we must also keep in mind that not all the people affected by the riots were insured and, in some cases, may be underinsured and SASRIA may thus not be liable for the total loss of the riots. The most recent financial statements for SASRIA indicate that there is around R7bn in free capital available for the payment of claims, with a target solvency capital ratio at 230%. This amount of risk bearing capacity could of course have been augmented via reinsurance contracts, but it may be that those facilities will be inadequate. How SASRIA has structured its reinsurance programme is unknown, but indications based on past results are that it may be possible for it to recover about 50% of losses from reinsurance arrangements. That will increase the estimated R7bn own Risk Bearing Capacity by around R4bn, bringing the total available to around R11bn. As stated above, there is at the time of writing of this article uncertainty regarding the total amount of damage sustained in the riots, SASRIA’s total exposure, the structure of the reinsurance covers available, and the detail of SASRIA’s underwriting capital requirements and stress scenarios which were used to determine the capital requirement, and the damage to SASRIA given the current situation.
SASRIA is regulated as a non-life insurer in terms of the Insurance Act and has to meet a minimum solvency capital requirement of 25% of the solvency capital requirement. Where the minimum solvency requirement is breached, an action plan must be crafted and agreed with the Regulator to regularise the solvency capital requirement within an agreed time frame. It may be possible for SASRIA to have used some sort of catastrophe facility, probably a stop loss arrangement which will kick in in case of such unprecedented losses. It is unlikely that this will go a significant distance to cover the total cost of these disturbances. Nevertheless, with Government as its only shareholder, the losses that will not be recoverable from reinsurers will have to be paid for by the Government and by implication, the South African taxpayer. Unfortunately, as we have seen in the cases of several State-Owned Enterprises, the cupboard is very bare and it is quite possible that SASRIA will be left technically insolvent after the dust settles. Premiums for SASRIA cover will most probably increase significantly.
Worse, should there be a repeat of these past weeks at some point in the near future, SASRIA is unlikely to be able to assist its policyholders as it would have exhausted its own capital resources. Those funds may be built up again over time, but there may not be enough time or financial capacity to achieve this in the next couple of years.
One can debate whether the appetite for nationalisation and the diversion of policyholder funds into the pockets of the State would have been so voracious had it been known that South Africa would be damaged so quickly and so deeply by a social uprising such as we have now seen, and for which the government has itself been blamed. By design, the open market was excluded from what seemed to be a very lucrative source of extra income for the State, and now the damage has to be carried exclusively by the State and its Special Risks insurer. With the principle of spreading the risk as far as possible as a cornerstone of the insurance business, it may well have been possible to privatise this type of underwriting amongst the general insurers in the market with their much wider access to expertise, capital and reinsurance facilities. To mix metaphors, keeping all the eggs in one basket has now seen the Government hoist by its own petard.