How South Africa can bridge the insurance protection gap

In the town of Mthatha, a week of unprecedented rainfall has left a trail of devastation: More than 100 lives lost, thousands displaced, and roads and public infrastructure washed away. The true economic loss of the Mthatha disaster, however, is not known yet.  But one thing is for sure – it is going to be significant. The national government has since committed R5 billion towards rebuilding efforts across the Eastern Cape, but even that may not be enough, highlighting just how fragile and reactive our disaster response systems have become.

What’s less clear is how many of the affected homes and businesses were insured. If they weren’t – and many likely weren’t – the question is, who carries the cost of damage? Is our existing insurance framework equipped and able to absorb losses of this scale? Does the government, as the reinsurer of last resort, have the reserves to rebuild at this magnitude of loss?

At this stage, the Mthatha losses have not been featured in losses or catastrophe events reported by insurers or reinsurers. This can only really mean one thing - these losses will not be recovered from the insurance and reinsurance companies.

Unlike in some other European countries that are prone to natural disasters, South Africa does not have a dedicated Natural Disaster Pool like we do for manmade disasters like civil unrest and terrorism, which are covered by SASRIA. The scenario of Mthatha is a typical case of the insurance protection gap, and the taxpayer will inevitably be liable to pay the cost for Mthatha. Unfortunately, most homes and infrastructure that have been destroyed will not be rebuilt due to financial shortages.   

This is the essence and core of South Africa’s growing insurance protection gap – the widening divide between the economic losses that are insured and the total losses suffered. It’s a structural risk that affects everyone: individuals, businesses, public institutions, and the economy at large.

What’s driving the insurance protection gap in SA?

In the last decade, we have seen the widening of the insurance protection gap globally and in South Africa specifically. There are three key reasons why the insurance protection gap is widening – and why it’s likely to continue doing so if we don’t act decisively.

First, there’s the issue of affordability. With high costs of living, poverty, inequality, and persistent unemployment, insurance often becomes a luxury. Many households cannot afford insurance, leaving them financially exposed when disaster strikes. This will mainly include people living in the informal sector or rural areas. In some cases, their houses are built in low-lying areas, which makes them vulnerable to natural disasters.

Secondly, there is an issue around financial literacy and a lack of demand. In most cases, there is the right type of insurance product available, and it is priced properly, meaning clients can afford it. However, financial literacy and the appreciation of insurance may drive people and businesses not to purchase insurance, and when disaster strikes, they find themselves uninsured.

Finally, there is the issue of insurability. The nature of the risks themselves has changed over the past few years. Climate change has made natural disasters more frequent and more severe. Floods like those in Mthatha and the 2022 KZN deluge have become the norm, not the exception. This means insurers and reinsurers are no longer prepared to offer cover for some of the areas, especially low-lying regions.

The problem of climate change is not only floods, but we have also seen extreme drought. Drought insurance cover for farmers, especially small and emerging commercial farmers, is not easily available. With climate change, unless we implement proper risk mitigation and risk finance solutions, most places along the coast could become uninsurable, and in addition, we will see an increase in perils that are excluded from insurance policies.  

In all these cases, there is an expectation that the government will provide financial support, which places an additional financial burden on already strained government coffers. Insurance can be seen as the backbone of the economy, and a lack of financial solutions has a direct impact on our economy.

Reactive isn’t working

The current model of disaster relief is largely reactive. The government declares a state of emergency, releases funding, and begins a slow process of rebuilding. But it’s inconsistent, unpredictable, and, most importantly, unsustainable. In fact, we do not have a financial risk solution to deal with these natural disasters in the country.

Events like Mthatha expose just how underprepared we are for systemic climate risks. Emergency response alone is not enough. We need to shift towards a proactive, pre-funded model that distributes risk across public and private actors, and gets financial support into communities before losses get out of hand.

What can be done:

-        The urgent need for a CAT risk pool

One of the most effective solutions would be to establish a national catastrophe risk pool focused specifically on natural disasters. We already have a precedent: SASRIA, which covers strikes, riots, and unrest – risks the private sector cannot underwrite alone. SASRIA works because it’s a collective, state-supported mechanism that gives the market scale and resilience.

We need a similar model for climate-driven disasters. A dedicated CAT pool could aggregate risk, enable broader coverage, and ensure faster payouts when floods or droughts occur. It could also take pressure off national disaster relief funds, which are often depleted or delayed.

Importantly, such a pool should not be viewed as a bailout mechanism for uninsured losses or as a replacement for the private sector. Rather, it would complement the conventional insurance companies and offer affordable solutions where a gap exists.

The government must take the lead in establishing such a pool, but the private sector has a key role to play too. It not only brings technical expertise and underwriting capacity but also claims infrastructure and deep risk knowledge. Without coordinated public-private partnerships, efforts will remain fragmented and insufficient.

Other countries have shown what’s possible. In the UK, France, and Spain, the Natural Disaster Pool provides affordable cover to homeowners in high-risk areas and complements the private insurers and closes the protection gap. In Japan, the government reinsures earthquake insurance liabilities underwritten by private insurers.

We don’t need to copy these models exactly – South Africa has its own challenges and market dynamics to consider – but we can take valuable lessons from them about what works and what does not. The bottom line is that insurance works best when it is systematised and scaled. The individual, out-of-pocket model is not fit for this era of climate catastrophe.

-        Creation of contingency pool

In addressing the insurance of the government’s infrastructure, which is currently uninsurable, while also finding a financial solution for people who currently can’t afford insurance and are mainly depending on the welfare network, the creation of a government contingency pool is critical. This contingency pool can be extended to provide protection and cover for other sovereign risks. This could easily be managed and run properly by the Natural Disaster Pool. Insurance professionals are better equipped to deal with risk than the government is. The government can also benefit from a public-private partnership.    

-        Parametric insurance

There is no doubt that parametric insurance should be included in South Africa’s basket of solutions. Parametric insurance (or index insurance) is crucial to dealing with natural disasters. Regulators and the insurance industry are currently exploring this product as a tool in tackling uninsurable risk, which is a viable solution and way forward.

-        Risk mitigation

Climate change is going to be with us for a long time, and unfortunately, we cannot control it. Instead, it is critical that the infrastructure we have in South Africa is maintained well. This maintenance includes basic protocols and practices such as cleaning drainage systems and clearing dry vegetation around buildings. We should also make sure that we always upgrade and have adequate infrastructure in place. In addition, we must ensure that all regulations and bylaws are enforced.

Building a more resilient insurance system

Beyond the risk pool, we need to modernise how we design, price, and distribute short-term insurance products. Technology can play a major role here. Mobile-based distribution, usage-based pricing models, and simplified product designs are already being tested in the market, and they have real potential to make insurance more inclusive.

The regulator also has a role to play in supporting innovation and ensuring that policies do not unintentionally exclude the very groups most at risk. But regulation alone is not enough; we need practical, scalable solutions that reflect the realities on the ground.

Events like the floods in Mthatha make this painfully clear. We cannot afford to treat this disaster as an isolated incident. It is part of a larger trend, one that will accelerate as climate volatility increases. We’ve dealt with the emergency response – now comes the harder question: how do we prevent the next Mthatha, or at least reduce the economic fallout when it happens?

The answer lies in bridging the insurance protection gap, not after the fact, but before disaster strikes. This requires foresight, coordination, and commitment from all industry stakeholders because in the face of climate risk, no one can afford to go it alone.

* Masondo is the CEO of PSG Insure

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