Satellites offer a new solution for South Africa's wildfires
A version of this article by MNK Re Group Chief Executive and Managing Director Manoj Kumar and MNK Re Head of Innovation, Harry Titherley, was first published in the March edition of FA News.
Wildfires are devastating for communities and sectors across South Africa. Affecting over three million hectares across the country in 2021 alone, these fires ruin large tracts of grazing land, kill livestock and threaten the food security of thousands of subsistence-level farmers. Moreover, these disasters, namely the Table Mountain wildfire last April and the fire in the UNESCO protected Magaliesberg Biosphere Reserve, can not only impact the agricultural sector but also cause significant cultural and environmental damage, having resulted in estimated losses of R3.5bn (USD 232 million).
With large portions of South Africa continuing to experience long-term drought and excessive heat, these fires are becoming more frequent and traditional insurers are struggling to offer coverage to those most vulnerable.
The solution is parametric insurance. If used effectively by risk management professionals, these solutions can be used to better prepare for future disasters and help communities recover more quickly following a catastrophic event.
The applications of this highly versatile risk transfer tool are numerous. Whether being used to fill in the gaps where traditional insurance falls short or for providing the certainty of full protection from Natural Catastrophe and extreme weather events, parametric solutions offer wider coverage to policyholders while reducing basis risk and can even provide coverage for what were historically uninsurable exposures as well as emerging risks.
By leveraging the latest technological developments, including but not limited to remote sensing (satellite monitoring), Artificial Intelligence and virtual weather stations, clients not only benefit directly from the savings that result from the reduction in frictional cost but are also able to achieve the most comprehensive coverage available on a named peril basis.
With global premium for parametric insurance now exceeding USD 5 billion and growing approximately at 10% year-on-year, this approach is fast being adopted and incorporated by clients around the world into their risk transfer arrangements. Now is the time for insurers to employ this technology to help provide cover for wildfire-affected communities.
Parametric Wildfire “Burn Scar” coverages are available from the specialist insurance market to specifically address the risks of wildfires and bushfires. Satellite data, algorithms and Artificial Intelligence are used to identify burnt areas and to determine fire severity with considerably higher precision than human detection.
Coverage is based on pre-defined wildfire parameters and an indemnity limit is agreed prior to the policy being issued, providing clients with certainty that a catastrophic weather event will not be followed by an equally catastrophic insurance cost. Wildfire parameters are measured in real-time with the policy being triggered when the threshold is matched or exceeded. In the event of a wildfire affecting the selected area, pay-outs are typically made within 15 days after the event.
The use of satellite monitoring to assess the loss eliminates the requirement for traditional loss assessment, simplifying the process considerably and enabling the rapid, hassle-free and indisputable settlement of claims. This is a particular benefit to customers located in remote areas and in regions where continuing COVID-19 restrictions might limit the movement of people. Furthermore, these satellite-based parametric policies are often more affordable when compared to the policies that are offered by the traditional market on a standard basis.
By taking a holistic view and considering parametric solutions as a complement to existing risk transfer arrangements, risk managers can benefit from a highly efficient and effective tool that addresses gaps in coverage and protects portfolios and communities from climate shock, bringing much-needed stability at a critical time. Simple, transparent and efficient claims payments are made within days, ensuring short-term liquidity and continued access to credit and capital for customers to rebuild their lives following a devastating event.