Insurance providers in South Africa have included an exclusion for total Eskom grid failure

Several major South African insurance firms have refused to cover their clients for certain damages caused by Eskom’s power grid outage.

Moneyweb broke the story after obtaining an email from Hollard Insurance informing consumers of a new “Electricity Grid Failure” exclusion added to their plans.

Hollard spokeswoman Warwick Bloom noted that although a total grid breakdown remained unlikely, it was now a “possibility”.

Reinsurers, which give financial security to insurance companies, have stated that they will not provide reinsurance coverage in the case of a grid breakdown, according to Bloom.

“This means that electricity grid failure — as defined in our letter to our clients — is an uninsurable event,” Bloom explained.

“Along with other insurers, Hollard is attempting to make this clear for policyholders.”

Following Hollard’s policy update, MyBroadband contacted insurers to see whether they were also making changes to account for total grid failure.

According to Momentum Insure chief actuary Rudolf Britz, the firm does not cover grid failure itself, but the consequence of grid failure is still covered.

“For example, if your car is insured through Momentum Insure, and an accident is caused due to a traffic light that is not working due to a blackout, your cover remains intact,” Britz stated.

“However, if your business does not survive due to a total blackout, it will not be covered.”

Santam and Outsurance are two additional insurers who plan to discontinue offering coverage in the event of a grid collapse.

Santam announced a broad electrical grid breakdown exclusion on all insurance beginning 1 April 2023 at the presentation of its financial results for the six months ending June 2022.

Santam personal underwriting head Attie Blaauw told MyBroadband that the insurance sought to clarify what it could and could not cover for clients and brokers.

“We continue to experience great pressure from our reinsurance providers to limit any exposure to systemic events,” said Blaauw said.

“In addition, given the frequency and severity of load-shedding, the change in risk of a potential grid failure cannot be ignored.”

Outsurance also informed MyBroadband that it was examining its product language to ensure there was no doubt over the fact that it would stop coverage in the event of a grid breakdown.

“It is not possible for an insurer to cover a complete grid failure and the associated losses,” Outsurance said.

“The accumulation of these losses is not something that can be priced for as part of an insurance product or sufficient capital held to cover such a loss — as such it is an uninsurable loss.”

Ernest North, co-founder of Naked Insurance, stated that because many reinsurers have stated that they would not give reinsurance protection for grid failure, it appears to be an uninsurable catastrophe that will be excluded by all insurers in the future.

Significant increases in load-shedding claims

Insurance claims for damage to items caused by load-shedding have increased significantly at Momentum, Naked, Outsurance, and Santam.

It is vital to realise that load-shedding varies from a grid breakdown, commonly referred to as a “blackout”.

Load-shedding is a regulated procedure in which Eskom’s System Operator advises the utility’s customers — municipalities and businesses — on a regular basis to switch off electricity delivery to specific locations.

Load-shedding is not an insurable occurrence in and of itself, but an impact might be that an electricity user suffers damage to plugged-in equipment owing to a power spike that can occur when power in their region is restored.

To avoid this, Eskom has advised users to disconnect electrical gadgets during load-shedding. Nonetheless, insurers often pay claims if a customer’s equipment is destroyed as a result of a power surge.

This possibility is covered by default in some house insurance policies, but some insurers need it to be purchased as an add-on.

This is expected to continue, but policyholders must also verify that their maximum coverage limit matches the worth of their gadgets in order to prevent being under-insured.

Outsurance is one of the insurers that has accepted the need to increase the excess on certain claims in order to maintain overall premiums affordable.

It also encourages users to put surge protection devices on appliances or main distribution boards to avoid harm.

“These solutions are very affordable and effective,” Outsurance said.

What happens when the power goes out?

A grid breakdown happens when there is more demand for power on a network than there is available supply, which load-shedding has managed to minimise for years.

When demand exceeds supply, the system becomes imbalanced, resulting in the grid running at a lower frequency than intended.

The frequency of the grid should normally remain between 49Hz and 50.1Hz.

Gavin Hurford, Eskom’s National Control Manager, has indicated that a dip below 47.5Hz would be catastrophic, with Eskom’s power plants tripping automatically to defend themselves.

This would result in a cascade effect in which less and less capacity is available to meet demand, and the frequency drops even more, potentially damaging transformers and other electrical equipment.

When the frequency is fluctuating, it appears that harm caused by power surges resulting to a total blackout is unaffected by the grid failure exclusion.

According to Santum’s Blauww, the exclusion refers to when there is no power supply.

“Power surge cover is something different, and we continue to offer this to our clients,” he said.

Britz from Momentum agreed with this assessment.

“Operating at higher or lower frequencies is usually described as a power surge,” said Britz. “If the policy includes cover for power surges, this would still be included.”

“A good example of a claim due to grid failure is deterioration of refrigerated or frozen contents that may go bad due to lack of power over a long period of time, or if clients cannot earn an income due to the blackout,” said Britz.

“However, if a fire happens and the fire prevention equipment fails due to the blackout, for example, Momentum Insure cover applies.”