As South Africa grapples with intensifying natural disasters, municipalities stand on the front lines, tasked with responding to crises that threaten lives and livelihoods. Yet, insurance plays a limited role in their disaster risk financing (DRF), according to a report commissioned by National Treasury and the World Bank.
Disaster Risk Financing Approaches: Independent Report on the Experience of South African Municipalities provides critical insights into the DRF mechanisms available to municipalities, their practical application, and the systemic barriers that hinder effective disaster response.
According to the report, between 1952 and 2019, South Africa experienced US$9 billion in economic losses due to disasters, including droughts, floods, wildfires, and violence. More recently, the 2022 KwaZulu-Natal floods saw 459 people lose their lives, more than 4 000 homes destroyed, 40 000 people left homeless, and 45 000 people temporarily left unemployed. The cost of infrastructure and business losses was about US$2bn.
The 2022 Intergovernmental Panel on Climate Change report indicates that natural disasters will probably increase in severity and frequency given the likely rise in temperature because of climate change, even after the implementation of risk-reduction activities.
The report says municipalities in South Africa rely on five primary DRF instruments to fund disaster response and recovery: budget reallocation, contingency reserves, disaster grants, insurance, and other support from sectoral departments, non-governmental organisations, or universities. Each instrument presents unique challenges, contributing to a fragmented and often inadequate financial response to disasters.
Budget reallocation
Budget reallocation is the most widely used instrument, with 92% of municipalities employing it for immediate disaster response. Municipalities are required, per section 56(2)(b) of the Disaster Management Act (DMA), to use their own resources as a first response before requesting national support. Section 29 of the Municipal Finance Management Act (MFMA) allows municipalities to authorise unforeseen expenditure through adjustment budgets, while operational funds can be reprioritised for urgent needs such as emergency repairs.
However, reallocation poses significant drawbacks. Diverting funds from routine maintenance, travel, or community development undermines long-term infrastructure resilience.
Municipalities with limited resources and high disaster exposure face ongoing struggles to maintain resilient infrastructure, exacerbating vulnerability to future shocks.
Contingency reserves
Contingency reserves are intended to provide a proactive financial buffer for disasters, as encouraged by the DMA. However, their use is limited by regulatory constraints and municipal revenue shortages. The MFMA allows municipalities to invest funds not immediately required, enabling the accumulation of long-term reserves. Yet, National Treasury’s MFMA Circular No. 108 (2021) discourages discretionary funds, citing risks of misalignment with community needs or potential misuse. This regulatory uncertainty leaves municipalities unclear about permissible budgeting practices for disaster reserves.
High-risk municipalities, particularly smaller rural ones, struggle to establish ring-fenced contingency budgets because of competing fiscal demands.
Disaster grants
Disaster grants, administered by the National Disaster Management Centre (NDMC), include response grants for emergency repairs and recovery grants for long-term reconstruction. In 2023/24, R2.4bn was allocated, with 54% of municipalities receiving grants over the past two years. However, grants are plagued by delays and administrative inefficiencies. The median recovery grant amount is R37.3 million, but municipalities receive, on average, only 55% of the amount applied for, with little explanation for rejections.
Insurance: limited coverage
Insurance plays a minimal role in municipal disaster response because of underinsurance, inadequate coverage, and systemic market constraints.
Municipal insurance typically covers movable assets, buildings, vehicles, and third-party liabilities, but infrastructure assets such as roads, bridges, and underground networks are largely uninsured. For instance, pipelines beyond 150 metres from treatment facilities or reservoirs are excluded from coverage, as are dams, roads, and most electrical distribution networks. Power stations and water treatment facilities are often insured, but their associated infrastructure is not, leaving critical systems vulnerable.
The report notes that municipalities insure assets at net book value rather than replacement value, leading to significant underinsurance.
Poor asset management, including outdated or inaccurate asset registers, further limits coverage eligibility. Effective asset management is a prerequisite for most insurance policies, but many municipalities lack the capacity to maintain comprehensive registers.
Claims processing delays
Insurance claims processing is protracted, often taking more than a year, which delays recovery efforts.
Municipalities report varying success with claims, with payouts often covering only 50% of claimed amounts because of underinsurance or rejected claims.
Delays and partial payments leave infrastructure, such as roads and sewer systems, unrepaired for extended periods, as seen in KwaZulu-Natal, where storm damages from 2022 remained unaddressed by 2024. In some cases, insurance payouts are reprioritised for other municipal needs, further delaying repairs.
Market constraints
The insurance market offers limited options for municipalities because of a lack of competition and regulatory barriers. Parametric insurance, which provides immediate payouts based on predefined triggers (for example, rainfall levels), is not yet available for urban risks in South Africa. The South African Reserve Bank (SARB) has not issued guidelines for parametric cover, restricting its adoption for catastrophic events.
The report suggests that National Treasury and the SARB develop such guidelines to enable parametric insurance for metros, provinces, or national coverage.
The report highlights the South African Special Risk Insurance Association (SASRIA) as a successful model for covering commercially uninsurable risks such as civil unrest, recommending its expansion to address climate-related risks.
Additionally, cell captive insurance is proposed as a potential solution, drawing on global examples such as Australia’s municipal insurance model.
Poor maintenance and risk preparedness
Poor infrastructure maintenance directly undermines insurance effectiveness. The Auditor-General’s 2023 report notes that municipalities allocate only 1% of budgets to maintenance, far below the recommended 8%, accelerating infrastructure deterioration.
Fire risks, exacerbated by inadequate municipal fire services and poorly maintained safety systems, lead to increased claims and liability issues.
Insurers cite municipal capacity constraints as a barrier to effective risk management, compounding coverage limitations.
Other DRF support
Municipalities receive support from sectoral departments, NGOs, universities, and private entities, but this assistance is often ad-hoc and insufficient.
The Department of Human Settlements provides emergency housing grants, while the Department of Transport assists with road repairs. However, overlaps and gaps in responsibilities create budgetary challenges. For example, delays in sectoral support force municipalities to cover costs initially, straining budgets.
