Africa disproportionately affected by climate change, say insurers

African insurers, reinsurers and brokers will play an important role in assessing and managing the impact of global warming on the continent, which will disproportionately affected by climate change. This is according to the newest edition of the Africa Insurance Pulse, an annual report produced by Faber Consulting and based on interviews with senior executives from insurers, reinsurers and brokers operating in Africa. The study finds that floods and droughts are the two most common climate risks for African insurance markets. But it says the sector is well positioned to work closely with governments and partners to mitigate and protect African societies and economies against the consequences from climate change. Jean Baptiste Ntukamazina, secretary general of the African Insurance Organisation, said: “Extreme weather events such as droughts, floods, storms and cyclones are clearly evident in Africa. These occurrences will increase in frequency and intensity across the continent. Africa's exposure to natural disasters and climate change is disproportionately high, not least because of urbanisation and economic growth, but also because of low adaptive capacity and limited resources to prepare for and manage the aftermath of disasters. Through analysis, underwriting, investment and advice, our sector is helping to understand the complexities of climate change, working with policymakers to reduce its impact and create new opportunities, particularly in the renewable energy sector.” According to the report, developing countries in Africa are particularly vulnerable to the effects of climate change due to their low adaptive capacity and widespread poverty. Across east and west Africa, climate change is forecast to affect GDP per capita by about 15% by 2050 under severe warming scenarios. In northern and southern Africa, the negative impact of climate change on GDP is estimated at 10%, and in central Africa at about 5%. Simone Lauper, partner at Faber Consulting, commented: “Increasing urbanisation in Africa means that the catastrophe risk profiles of African countries are shifting from predominantly rural areas, where drought and food security are the biggest challenges, to urban areas, where floods, cyclones and earthquakes are the biggest risks.” Insurers in the study note a significant increase in the frequency of climate risks, particularly tropical cyclones in Mauritius, Madagascar and Mozambique, as well as floods in west and east African countries, and forest fires in north African countries and hailstorms in South Africa. Insurers also see an increase in the severity of extreme weather events, especially tropical storms and floods, and a sharp increase in values in urban areas, which contributes to the rising cost of claims after disasters. The majority of respondents have seen weather risk prices in African markets increase during the past three years and expect them to increase further in the next 12 months. Capacity has increased for primary insurers, while it has remained largely stable for reinsurers, and conditions have been tightened. “Global reinsurers would be willing to increase capacity in African markets, which would diversify their main natural catastrophe risks in the Americas, Europe and Asia,” states the report. “However, 52% of respondents said that reinsurance capacity for climate risks remained stable over the past three years as primary insurers have increased their retention rates, given higher prices and stricter terms and conditions. One participant noted that regional reinsurers play a more important role in weather risks as they replace capacity no longer offered by leading global reinsurers.” A survey conducted as part of the study found that the majority of respondents have recently seen a tightening of insurance and reinsurance terms and conditions, primarily to provide greater contractual certainty and exposure transparency regarding the impact of climate risk. The report says the tightening takes many forms, including higher deductibles, narrower definitions of events, more loss limits, a shift from proportional to non-proportional coverage, and some exclusions, for example for drought risks. On the issue of climate change risk modelling, a large majority of the insurance market experts surveyed (about 70%) do not believe that it has improved in recent years. The report says the main reason for this is the lack of reliable historical data on natural disasters in many African markets and the limited economies of scale that make investment in model development less attractive.

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