Karen Rimmer, Head: Distribution at PSG Insure
Loadshedding – a measure implemented by Eskom to address mounting pressures on the national electricity grid, has been a South African reality since 2007. The past few years have, however, seen a dramatic upsurge in the severity of scheduled blackouts as Eskom attempts to deal with multiple infrastructural problems as well as theft and vandalism.
The implementation of stage 6 loadshedding, compounded by various other internal challenges at Eskom, has seen the emergence of predictions from many sources that national grid failure may be an imminent possibility.
“Although experts are currently divided on whether the potential for complete grid failure is indeed a likelihood,” says Karen Rimmer, Head: Distribution of PSG Insure, “insurers need to be prudent in preparing clients should such a situation occur.”
Understanding the risk related to grid failure
Total grid failure would involve the complete loss of power supply and distribution via the national network for an unknown period of time. Should grid failure occur, the impact on homes, property and business owners would be immense.
Security systems, such as alarms and electric fencing may be rendered inoperable. The proper functioning of fire detection systems may also be disrupted, rendering these systems slower to respond to smoke or abnormal temperature increases.
The resultant failure of refrigeration systems could also lead to major stock losses for food-related businesses as well as South African households. The knock-on effect of grid failure would also impact the national water and sanitation systems, possibly leading to a lack of water supply or reduced water pressure.
“With the failure of multiple systems servicing homes and businesses throughout the country comes the increased risk of fire outbreaks, opportunistic crime, business interruption and extensive damage to property and other assets,” explains Rimmer. “These risks will likely land on the shoulders of insurers, as clients turn to their policies for financial relief in managing the impact of these risks.”
Grid failure as a policy exclusion – what this means for the insured
With these looming threats becoming increasingly more serious, numerous insurers and industry bodies have announced that grid failure as a whole will be regarded as an exclusion on insurance policies. Many of these insurers regard grid failure as being equivalent to events such as a nuclear incident or the outbreak of war, so grid failure and consequential loss is therefore widely regarded as an uninsurable risk.
“Should total grid failure occur,” says Rimmer, “policy clauses such as ‘prevention of loss’ and ‘duty of care’ will still apply. What this means for insurers and their advisers is that clients – both individuals and businesses – need to be made aware of what these clauses mean and what their risk mitigation-related responsibilities are.”
Ultimately, these clauses infer that clients must take all reasonable precautions to prevent loss, damage or liability during events such as loadshedding. This would include, for example, installing adequate surge protection on all power outlets to prevent losses caused by sudden electrical spikes. Similarly, the ‘duty of care’ clause relates to the client’s obligation to exercise due care to avoid or minimise loss or damage. This could include ensuring that electric fencing security systems have adequate backup power and battery supplies to remain functional during prolonged power cuts.
“In the event of a claim, whether related to grid failure or not, the insured will likely be called upon to produce proof that these obligations have been met. Claims are reviewed on their individual merit and could be repudiated if non-adherence to these clauses is discovered by the insurer,” adds Rimmer.
Action points for insurance advisers
Now, while grid failure remains a possibility rather than an immediate threat, clients should also reach out to their insurance advisers to ensure that they are aware of what policy wording means in this regard. Clients also have a window of opportunity to contact suppliers and service providers on factors such as security, water supply and plumbing, electricity and fire detection systems. Qualified professionals in these fields are in the best position to offer clients alternatives and recommendations that can help them prepare for risks that relate directly to the current energy crisis.
“Advisers will also need to apply their minds, expertise and sector-specific knowledge to support businesses in implementing continuity plans and strategies to keep their doors open in the event of a crisis,” says Rimmer.
Should the grid face a collapse, insurance advisers will play a vitally important role in ensuring that insurers remain financially viable and that the confidence of the clients who support the industry can be retained.
“However, reactive responses to grid failure will not be sufficient in helping clients and insurers navigate their way through a period of unprecedented risk and uncertainty. Proactivity and preparedness are therefore key to providing superior customer service, preserving the reputation of insurers and developing insurance products and services that are in line with what the future holds for South Africans,” concludes Rimmer.