The impact will especially be felt through the implications of insurance cover carried by some industries, according to a recent press release by Alexander Forbes Risk and Insurance.

While most insurers would cover losses resulting from unplanned mechanical interruption, any damage resulting from interruptions by planned breakdowns like load shedding and electricity supply failures due to insufficient fuel provision at power stations would not be covered.

Debbie Geraghty, head of the Metals and Minerals division at Alexander Forbes, said that the load shedding announced by Eskom has up until now occurred in four- to six-hour periods. For certain industries this means between three and six weeks downtime per interruption.

“This has sobering implications for both the national and international economies,” she said.
“Most insurers have a cap or sub-limit, that is, the maximum amount that policy holders can claim under their business interruption cover. Furthermore, this sub-limit usually includes a time limitation.

“Businesses can generally only claim up to, and no more than, R250 million per interruption. This is also usually subject to a 30-day time limit. In other words insurers will provide a maximum of 30 days cover (per interruption) or R250 million, whichever is the lesser,” Geraghty said.

Despite these limitations, if large numbers of South African mines were each to claim up to R250 million, the impact on the local and international insurance markets would be profound.

Given that South African mining and industrial debt was reinsured globally, in this worst-case scenario, the potential sums called upon to cover South African electricity-related loss could cause a global reinsurance shock.
The cost of reinsuring South African risk going forward was likely to increase – driving up the cost of investing in South Africa, Geraghty warned.

The global industrial impact, however, also poses further threats to the industrialised world, she said, and gave the example of smelters, or any kind of business that operates furnaces that can’t simply be switched off.

When they are switched off, it needs to happen slowly over a number of days, ensuring that molten metal does not solidify in the furnace and destroy the whole plant.

Similarly, once switched off, furnaces need weeks to be restarted as they heat up in several stages, slowly building up temperatures along with volumes. If things are instantly switched on again there is a high risk of explosion.

The same applies to underground mines. If a mine is closed for three or six weeks, it is often very dangerous to re-enter and expensive to re-start.

“While Eskom has provided most mines with sufficient electricity to keep pumps going, if this power were to fail mines would flood. Furthermore, mines abandoned for a number of weeks need to be made safe with additional supports to prevent collapses resulting in injury, damage, production interruption – and further claims,” Geraghty said.

The global impact of the uncertain electricity supply is also delivered via industries like shipping.

“Power outages preventing efficient loading and unloading of vessels could cause extensive demurrage costs. If these were caused by deliberate power interruption, like load shedding, insurers would not make good the extra expenses incurred,” she said.

Electricity supply failures also compromise the ability of the rail system to deliver coal and other ores and minerals.
“If trains, which run on electricity, or mines stopped producing due to electricity failure, South Africa would run through its limited stockpiles of coal and other ores within weeks. Mines would lose sales and receiving smelters and other industries the world over experience supply shortages, rising input costs, production interruption, decreased sales, and reduced profits,” she said.

Insurers look at the causes of electricity failures that leads to a client lodging a claim. Industrial policy holders therefor need to be 100% sure of what they are covered for.

If not properly covered, policy holders should have the relevant clauses of their policies rewritten even though this may increase their premiums, the press release stated.

Piet Coetzer