The impact of drought on insurance

South Africa is currently facing a water shortage, with parts of the country experiencing water restrictions. This can have an impact on businesses, not just in the farming and agricultural sector, but in other sectors and consumers’ lives as well.
 
“Businesses – across all sectors – need to start realising the potential devastation and associated costs that can arise from the current drought conditions, and should be implementing risk management strategies accordingly,” said George Davis, head of construction and engineering at Risk Benefit Solutions (RBS), one of South Africa’s largest independent insurance and risk specialists.
 
Insurance and water restrictions
 
Davis emphasised that businesses need to be aware that drought and water shortages are not an insurable event. “Insurance sometimes provides a false sense of security for businesses, but owners should not be relying on their policies to cover losses associated with water interruptions.
 
“Most insurance policies for industry will contain specific exclusions such as ‘the deliberate withholding by the supply authority of water, electricity, gas, fuel, steam or refrigerant’. Insurance will therefore only respond to an unexpected, unforeseen or sudden event,” highlighted Davis.
 
A spokesperson for Santam noted: “From a crop insurance point of view drought related claims under the multi-peril crop insurance policy are only possible once a crop has been planted and accepted by Santam.  Should drought occur after this stage, damages are covered.”
 
“Despite the drought affecting vast areas of the north of the country, Santam has not received any drought related claims to date because farmers have not been able to plant crops yet. Planting dates for the eastern production areas (Eastern Free State and Mpumalanga) are delayed due to the drought and the planting window is closing in the second part of November. Plants are therefore still very small. The best planting dates for the central to western production areas are only in the last week of November and first week of December and plantings will only commence once sufficient rainfall occurs over these areas,” revealed Santam.
 
However, not all drought related or water restriction related losses are covered by insurance. Natasha Kawulesar, head of client relations at OUTsurance, noted that while the company does cover the assets of farming businesses, it does not cover crops and livestock, “which would be the part mainly affected by the drought.”
 
With regards to other businesses that may be affected by water restrictions such as car washes, and other businesses that rely heavily on water, Kawulesar revealed: “We do cover car washes and provide “Business Interruption” cover to them.  For a client to be able to claim on their business interruption cover, they must have a valid claim on certain material damage sections such as Fire.  If there was a fire that caused damaged to our client’s business and as a result of this, he is unable to perform his business activities, then he would be able to claim under his “Business Interruption cover” should he have this cover in place.
 
“Water restrictions due to drought is not an insured peril under any material damage section, so financial losses caused by drought is also not covered under Business Interruption.”
 
What sectors are affected?
 
According to Davis, while the agricultural sector is impacted by water constraints in the short term, in the long term, other sectors, such as energy and manufacturing, will also be affected due to their need for water in their processes.
 
If the drought continues and there are prolonged water restrictions, Davis pointed out that it could result in a reduction of electricity generation.
 
“Most power generation processes depend on the use of water for hydropower or coal-burning and nuclear plants. Therefore if water use is restricted, power plants may need to be shut down. This challenge is escalated when the drought is accompanied with high temperatures, driving an increased demand for temperature controlled environments,” said Davis.
 
According to Davis, the South African Weather Service has reported that the dry weather conditions may continue into March 2016, meaning that businesses will need to start making plans to deal with water shortages and restrictions.
 
“If a business’ industry is heavily reliant on water to manufacture or produce certain products, the lack of water will have a direct impact on the business’ balance sheet,” highlighted Davis.
 
Furthermore, Davis suggests that businesses which may be impacted by the water shortage should implement appropriate risk management strategies. “Depending on the type of industry and location, businesses could install additional water tanks. Alternative supply through bore holes may be considered, but a long term drought would most probably render the bore hole dry.
 
“A risk management strategy will therefore ensure a business is adequately covered for possible risks arising from water shortages – both from a damages and liabilities standpoint,” said Davis.