Droughts, floods, hail, extreme storms, increasing frequency of hurricanes, tornadoes and weather catastrophes are all problems for the insurance industry. Climate change is happening, and with temperatures in Johannesburg reaching all time records, at the time of writing 37°C (October 6th 2015), following Cape Town in March 2015 of 42,3 °C, combined at the same time with record floods in the South of France and in South Carolina, skeptics take note. Whether the cause is global warming, El Nino, from natural causes such as volcanoes, or more probably from man made carbons, nobody can conclusively prove, but the probability lies with both.
In South Africa a unique set of conditions exist. 98% of water heating is done by electricity, and Eskom belches carbon emissions feeding energy intensive electric geysers. At the same time geyser manufacturers build redundancy into their systems, offering warranties as little as 3 years to a maximum of 10 years. In Europe, in contrast, boiler manufacturers offer guarantees of up to 25 years.
Some 250,000+/- electric geysers fail in South Africa every year, and the majority of these are paid for by insurance.
Why do they fail? It is down to a combination of market dynamics and increasing corrosion, caused by increasing chlorine in the water with the water supply being under pressure from an ever burgeoning population. Chlorine when heated by an electric element in an electric geyser creates a very mild solution of hydrochloric acid, which is highly corrosive to mild steel.
Somewhat bizarrely this revolving geyser replacement industry works for everyone. The geyser manufacturers are happy, the plumber’s merchants and plumber installers likewise, with repeat work every 5-10 years with little credit or marketing risk, is more than welcome. The insurer also has benefited from several years premiums and the investment earnings, so to a greater or lesser extent it is an actuarial exercise. Even the customer feels that they are winning, getting something “Out” from the grudge purchase.
Commitment to the Green Economy Accord by insurers, where ‘burst’ electric geysers are replaced with solar is a lovely idea, but for years the solution hasn’t been found and it is not surprising.
The nature of insurance is that it is competitive, and every advertisement promises lower premiums and better cover. Increase the cost of the claim with solar and the premiums soar, making the insurer uncompetitive, and losing business. Getting customers and keeping them is an expensive exercise and consumers are ‘fickle’, moving insurer for a few hundred Rand a year saving.
Add in the service promise of getting the policyholder up and running again the same day with hot water, is not that difficult with an electric geyser, but a solar installation not only costs more but also takes far more time.
Hmm, the conundrum grows, and without government rebates to help subsidize the cost of the solar system over and above the cost of the electric, it is down to the consumer only, and many of them find it difficult to even pay the excess on the claim of R750-R1, 000.
So with climate change insurance losses increasing, reducing SA carbon emissions is important, but insurers are still unlikely to come to the party when it comes to geyser replacement with solar.
Is there a solution, well arguably ’Yes’. If government was to reintroduce subsidies for solar water heating it would help the price. But could government subsidize insurance claims, but not other electric geysers going solar, when the motivation has to be energy savings and carbon reductions?
If government were to levy a tax on homeowner insurance policies, funds could be generated to fund a pool to subsidize solar. But such ideas need to be kept in context. The environmental levy is tax on kWh used, collected by Eskom and municipalities, but the funds do not get recycled towards removing carbon, certainly on geysers.
The reality is that solar water heaters will as the price of electricity rises become increasingly attractive to the consumer. Payback on investment is heading towards as little as 2-3 years, and the returns on investment exceed anything you would get from an investment policy.
So the long term view could be that insurers will benefit from the consumer taking the initiative of going solar at no cost to the insurers and the consumer will save money from going solar.
However, the electric geyser manufacturers will lose out as solar will last far longer, (there is far less corrosion from solar power), the plumbers merchants will lose out, and so will the electric geyser plumber installers. Eskom will also lose out from less electric sales, and government will lose out on environmental levies on kWh’s not sold.
But it is going to take time, and in the meanwhile the insurance claims from climate change will keep on rising. The only real winners will be the consumer that embraces consumer renewables, as they will be saving money and reducing their individual carbon footprint.