By Emma Rumney

JOHANNESBURG, (Reuters) – The largest insurers in the world are expanding their operations in Africa to take advantage of the growing middle-class and population. However, climate change may complicate their pursuit for profit.

Due to the overcrowding of Western markets, this continent is a unique opportunity for growth.

The equivalent of 12 percent of America’s GDP or economic output is spent on insurance premiums. According to SwissRe (OTC): This is approximately four times what the African Insurance Organisation estimated for 2019.

The region is however facing some of the most rapid global warming.

The Intergovernmental Panel on Climate Change reported that temperatures rose twice as fast in Southern Africa in five years to 2019 compared to global norms.

However, insurers remain unaffected and continue to look for ways to expand in areas that are more vulnerable.

Swiss Re is looking to increase its presence in Nigeria. The company plans on expanding into the capital city Lagos. There, sea surges are already threatening expensive real property and poor communities. Swiss Re is currently in discussions with Nigerian regulators to modify the regulations to permit foreign reinsurance companies to write more business.

Peer Scor would like to grow in agriculture — a vulnerable sector to extreme weather.

Standard Bank, Absa, and Sanlam are just a few of the major African insurers and banks that have made expanding to African markets a core part of their strategies.

Their portfolios will be exposed to increasing climate risk. According to the companies, there are multiple options to address this issue. They also suggested that clients could be consulted to help reduce their exposure to climate risk.

PEELING A ONION

Africa’s low levels of insurance and banking uptake by its young and rapidly expanding population make it one of the most appealing and untapped markets for financial services.

Prior to COVID-19 the African insurance market was predicted to experience compound annual growth rates between 2020-2025 of approximately 7%. This is nearly double what McKinsey had forecasted for North America and Europe, and three times as fast than Asia’s 7%.

Insurance companies are already estimating the impact of climate change on their business. They have stopped providing coverage in wildfire-prone areas like California.

However, Africa’s current low penetration means that large economic losses due to weather-related catastrophes are not yet reflected in insurance and credit portfolios.

Graphic: Economic vs insured losses in African disasters – https://graphics.reuters.com/CLIMATE-CHANGE/AFRICA-FINANCE/zjpqkmqbmpx/chart.png

Scor and Swiss Re stated that global reinsurers can build up their continent portfolio to diversify and protect themselves from climate risk elsewhere.

Beat Strebel, Swiss Re’s Middle East market executive, said that a flood in Lagos and drought in Kenya are not related to a tsunami occurring in Japan. Premium income can offset losses from one region by a compensation.

He said that the reinsurer could grow in the decades ahead, even though the continent accounted for only a tiny portion of their global business.

He said that in Nigeria, which has suffered huge losses from floods, the penetration of property and casualty coverage is just 0.3%.

Strebel highlighted the importance of new products, such as parametric and mutual insurance. Scor said that would also be important.

Parametric products use one data point to trigger payouts. This avoids costly visits by loss adjusters.

Scor has several pilot programs on the continent for agricultural parametric insurance. If it is successful, Scor could enter sub-Saharan African market.

However, insurance companies can still run into problems.

Kenya Livestock Insurance Programme, (KLIP), is one of the most popular parametric schemes. It was praised for providing financial assistance to smallholder farmers who lost their livestock due to drought.

To make the program work, the government subsistered premiums. However, Swiss Re was its primary reinsurance backing company and suffered years of losses when the droughts became more severe than they anticipated.

According to Richard Kyuma of the KLIP, Kenya’s highest official, it informed the Kenyan government that the KLIP would need to be reworked to increase its sustainability and reduce the payouts.

It is difficult to get accurate climate risk estimates, according to McKinsey partner Antonio Grimaldi. This is especially true when you consider the second order effects of climate change on individuals’ willingness to move to an affected region. African insurance companies and banks were the first to recognize that it was something they still have to grasp fully.

Wendy Dobson from Standard Bank stated that “climate risk is like peeling an onions, but there are always more layers,” Just when you think you understand something, it becomes apparent that we are not.