Building collapses: Not just construction failures; failures of risk advice

South Africa’s recent building collapses should concern more than engineers and regulators, they should concern anyone involved in financial advice, insurance and risk management. This is because what we are seeing, from George to Verulam to Ormonde, is not just structural failure, but a failure of how risk is understood, priced and managed across the short-term insurance industry.

The common thread with these recent tragedies is that risk was visible, but not acted on and from the investigations into these collapses, we can see some consistent patterns, including no approved building plans, substandard materials, unqualified or poorly supervised professionals and clear warning signs that were ignored.

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The George collapse in particular, which claimed 34 lives, was ultimately described as “entirely preventable” and from a financial perspective, that word “preventable” carries huge weight because it means the risk wasn’t unknown, it was unmanaged.

The uncomfortable question: were these risks actually insurable? In financial services, we often talk about transferring risk. But transfer only works when the underlying risk is valid, compliant and properly structured.

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In multiple recent cases, developments proceeded without approved plans, outside regulatory frameworks and with clear breaches in construction standards so in those scenarios, we are no longer talking about insured risk.

It is important to underline that buildings not compliant with local municipal regulations would not be insurable. This is instead uninsurable exposure and that distinction is critical.

Insurance is being brought in too late

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Worryingly, insurance is often treated as a procurement step, not a strategic input and when something goes wrong, the expectation of cover often does not match the reality of policy response.

One of the consistent failures in these cases is timing. Policies are placed after key decisions have already been made, without full visibility of compliance gaps and without stress-testing worst-case scenarios – missing the point of where real value in insurance sits, which is managing risk.

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Managing risk is the cornerstone of insurance in that when done well it gives both the insurer and the client a real edge and allows insurers to properly underwrite risks, taking into account safety measures, loss prevention strategies and client education. Good risk management entails complete compliance and avoidance of penalties.

This is where the role of a financial advisor, particularly in short-term insurance, becomes far more important than many realise. Good advisors are not there to simply place cover, they are there to interrogate risk and ask the often-difficult questions:

Are the plans approved and signed off?
Are the professionals appropriately qualified?
Are we compliant with the conditions required for cover?
What would happen if this fails, would the insurer actually pay?

The illusion of cover

Many of the risks we are seeing today could have been identified (and mitigated) much earlier, but only if someone is looking for them.

There is a dangerous assumption in the market that “having insurance” equals protection. It doesn’t.

In fact, a key principle in insurance is to act as if you are not insured.

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It’s clear that the compounding cost of poor risk decisions means loss of life, injury and immense community impact. From a financial perspective, the longer-term consequences are also severe with unrecoverable capital, business interruption without valid cover, legal disputes and liability claims and reputational damage that impacts future development.

When capital and resources are tied up in bad risks, one cannot invest in other profitable areas and so poor risk decisions also prevent future growth.

Read: From reflection to action: Why short-term insurance deserves attention early in the year

I’ve long believed that if there is one shift our industry needs, it is to move from selling insurance to protecting outcomes, which means engaging earlier in the project lifecycle, understanding the full risk environment, not just the asset and really and truly ensuring that compliance is real, not assumed.

These are not always easy conversations with clients, and certainly the responsibility lies with them to ensure truthful representations and clarity, but we have a role to play too.

The way forward

For me, the lessons from these collapses are clear: risk needs to be understood earlier; compliance needs to be verified, never assumed; insurance needs to be integrated, not just seen as an “add-on” and advice needs to be far more proactive, not reactive.

Gari Dhombo is the CEO of Short-Term Insurance at GrowthHouse, an independent financial planning and advisory business.

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