Contrary to belief, insurance companies aren't the only ones out of pocket. The bulk of the flood repair bill will probably be settled from government coffers - both nationally and at local municipal levels. The second slice of flood damage funding will probably come from Joe Average - the typically "uninsured"South African citizen. And that leaves the short-term insurers, possibly with assistance from their re-insurers, to take care of the balance.

Short-term insurers have the floods covered

What do the floods mean to short-term insurers? According to various media reports insured losses would be in the hundreds of millions, causing local insurers to increase their personal lines premiums. The reality is slightly different. Carike van Dyk, Product Manager Absa Insurance, says today's information systems allow them to get a feel for the impact of a national catastrophe two to three weeks after the event. "Absa has seen an increase in claims in December 2010 and January 2011; but this was anticipated during the rainy season,"she said.

Sedick Isaacs, Executive General Manager: Claims at Mutual & Federal agreed with these time frames: "We have had in excess of 1, 300 flood claims since mid-December 2010, and claims estimates [for our book of business] exceed R 30 million."He couldn't provide an estimate for the industry as a whole, and didn't indicate whether the extent of the claims received was unusual given flooding is a regular January occurrence.

Insurers have insurance too...

We asked Nash Omar, MD of Etana Insurance, to explain how insurers protect their books from natural catastrophes. "Re-insurance is a type of insurance that an insurance company like Etana places with another insurance company specialising in providing back-up for insurable risks,"he said. The insurer and the re-insurer share in the income from premiums and the losses from claims. Omar continues: "In the case of flooding, the re-insurer protects the insurance company insofar as the cumulative losses caused by a single event - such as a specific flood - exceed an agreed amount."

The insurers - based on the strength of their own book of business - decide how much of a "hit"they can take from a single event. Let's say flooding causes the Orange River to burst its banks in a number of places. That's one event. If an insurer feels they're ok to take R100 million hit for this event - they'll buy re-insurance for any damage beyond this. Despite the extent of the recent damage the insurers we've spoken to haven't reached a level of damage where their re-insurance kicks in.

Take Absa Insurance as an example. "We buy reinsurance cover to protect us from extreme accumulation of losses from a single event like a flood,"says Van Dyk. "We agree a total accumulation of claims from one event that we can absorb without impacting our results and the re-insurers reimburse us additional claims costs above this agreed amount - we do not currently anticipate any recovery from the re-insurers as a result of this event!"