Insurers under surging pressure
Power surge insurance claims over the past three years have escalated. This year those claims have increased by 80% alone, with many homeowner policyholders insisting this is caused by load shedding. Absa clarifies what is and isn’t claimable on a homeowner’s insurance policy, relative to load shedding, power surges, and worst case, a total grid collapse.
Insurers under surging pressure
Power surge insurance claims over the past three years have escalated. This year those claims have increased by 80% alone, with many homeowner policyholders insisting this is caused by load shedding. Absa clarifies what is and isn’t claimable on a homeowner’s insurance policy, relative to load shedding, power surges, and worst case, a total grid collapse.
By: Natasha Osman
Bancassurance Head of Homeowner’s Comprehensive Insurance (HOC)
Effectively, when averaged out, the country has been in permanent Stage 3 load shedding for a year. Measured in Gigawatt hours (kWh), load shedding in 2022 was 11 759. By May this year, the worst month ever in the history of load shedding, we had surpassed the entire total for 2022, at 11 970 GWh.
South Africa has suffered unprecedented levels of load shedding over the past two years which is seemingly increasing. This has led to speculation of a possible grid failure as Eskom has been slow to execute on any of the infrastructure improvements promised to improve the situation.
Electricity grid failure is defined as the unintentional, forced interruption and/or suspension of electricity, resulting in failure to supply electricity from the national grid, regional grid or any substation connected thereto, as well as any other electricity supply directly or indirectly linked to the national electricity grid, causing the failure of electricity supply to any province, suburb, town and/or any other place.
Eskom monitors SA power usage 24 hours a day and when its power stations cannot meet the demand for electricity, it switches off part of the grid, on a rolling time- and area-basis, to balance supply with demand. This is called load shedding.
Load shedding is defined by Absa Insurance as an event where there is a deliberate controlled shutdown of electric power in a part or parts of a power distribution system, up to a maximum of six hours at any one time, affecting different areas at different times, generally to prevent the failure of the entire system/grid when the demand strains the capacity on the system/grid.
South Africa’s total domestic electricity generation capacity is 58,095 megawatts (MW) says the Ministry of Mineral Resources and Energy, which would normally be sufficient to meet peak demand. However, a shortfall of between 4-6 000 MW persists due to ailing power stations, which when experiencing a breakdown or maintenance downtime, can impact on the loss of as much as 20GW in generating power.
This is the type of data that made reinsurers rather nervous, with most declaring that they would not cover such an event under their treaty agreements with insurers, expecting instead that local insurers must carry the risk or bring about exclusions should a national grid failure occur. This puts the local industry under severe pressure for if a national grid failure should occur, it would be catastrophic and most likely bankrupt most of the insurance industry due to having to pay all claims without such reinsurance support.
However, the insurance industry has never, in fact, offered insurance against grid failure … nor, for that matter, load shedding! What is covered, however, is a power surge, be it as a result of load shedding or otherwise.
A power surge is defined as a sudden change in voltage that significantly affects the standard flow of electricity, which normally enters your home through power lines and can cause damage to electronic/electrical equipment or any other item linked into the electricity reticulation system.
This implies that where the sudden change in voltage results in damage and is identifiable, this is covered under the power surge benefit, subject to it being from one sudden and unforeseen event/occurrence. Where the event/occurrence is not identifiable as sudden and unforeseen, or has occurred gradually resulting in failure, this would not be covered.
A power surge is normally covered as a benefit or as an extension on home insurance policies, with limits applicable. Most insurers have opted to cover power surge claims, even if due to load shedding, to assist their clients. Power surges that result from total grid failure are, however, excluded. The balance of insurers not honouring power surge claims have adjusted their policy terms and conditions, citing load shedding-related power surge claims as an uninsurable risk.
Homeowners may, therefore, be justifiably confused about whether they have a load shedding-related power surge claim or not. Clarity does come from understanding the essence of insurance, which covers sudden and unforeseen damages, but not gradual wear and tear nor gradual deterioration. Home contents cover may also include additional cover at an additional premium for mechanical and/or electrical breakdown cover, but again the wear and tear and/or deterioration aspect remains an exclusion.
The incident of load shedding, as mentioned, is not a peril, but a power surge resulting from load shedding may be. First understand that there really is no differentiation between a power surge caused by load shedding and one that is not. When electricity is restored post a load shedding slot, a sudden change in voltage can result in a surge of power that causes damage to an insured item, but a power surge may occur even without a load shedding incident, provided that it is identifiable as a power surge. If it cannot be proven that the event is identifiable as sudden and unforeseen or has occurred gradually over time resulting in a failure, the claim will not be honoured.
Within a household the most affected in terms of a power surge, are fixtures and fittings like gate and garage door motors, electronic appliances such as fridges, televisions, toasters, microwaves, computers, swimming pool pumps, in fact almost all appliances that are plugged into wall sockets.
Homeowner insurers are definitely seeing an increase in power surge claims and fire incidents since load shedding was reintroduced three years ago. In the latter case, fire claims are caused because stoves are not switched off when load shedding starts, and if there is oil involved, a fire can be ignited. Candles are also a cause of fire incidents after being dropped onto carpets or brushed against curtains and the like. A power surge can also result in fire, whereby electrical wiring comes under strain from the on- and off-cycle of load shedding, however, this is usually proven to be as a result of an incorrect wiring installation, which trigger a fire.
Managing expectations in the insurance industry
It is crucial that the homeowners insurance industry manage the expectations of their policyholders during the current power crisis. The perception prevails that all damages to plugged-in devices and appliances can be claimed for, and load shedding can be named as the cause.
As an industry, our role now is to clearly define the differences between grid failure, load shedding, and a power surge. While we might undertake investigations to ensure a policy claim is valid, it is imperative that we provide clear information and education to our customers around what can be done to mitigate and reduce the impact of load shedding on their assets.