Africa the new frontier for innovative insurance solutions

Africa is breaking insurance boundaries and these new solutions could be rolled out to developed markets, according to Tanguy Touffut, head of parametric insurance at AXA Corporate Solutions (AXA CS). Speaking at Commercial Risk Africa’s Sub Saharan Africa: The Next Generation Emerging Market conference late last month, Mr Touffut said that Sub Saharan Africa is “likely to become the new frontier for insurance solutions and possibly the insurance lab of the world”. He explained that as a result of new technologies and data-processing methods, innovative solutions to protect smallholder farmers have emerged across the entire African continent. Great progress has been made in terms of comprehension, prevention and risk transfer, he continued. “Africa is seeing many unique innovative insurance products emerge,” said the expert.hideIn his presentation, entitled ‘New technologies and insurance in Sub Saharan Africa: the parametric insurance example’, Mr Touffut asked: can new technologies help Africa innovate and, in return, provide lessons to the developed markets? As far as he is concerned, the answer is a clear ‘yes’. The need for new and innovative insurance solutions to predominantly help the African agriculture sector deal with climate risk is clearly a pressing issue. Five of the world’s ten most exposed countries to climate risks are African. These are Sierra Leone, Guinea Bissau, South Sudan, Nigeria and Ethiopia. Droughts and floods account for 80% of climate-related disasters in Africa and 96% of people affected by such events. Mr Touffut said the increase of weather anomalies in Africa has already begun and can be clearly tracked during the past 20 years. One of the reasons why Africa is, and will continue to be, hit hard by adverse weather is its economic reliance on agriculture. Agriculture accounts for 32% of Africa’s gross domestic product and employs 65% of its workforce. The value of Africa’s agriculture industry currently stands at $313bn and could grow threefold by 2030, according to figures presented by Mr Touffut. At the same time, insurance penetration in Africa, including within the agricultural sector, remains very low. Mr Touffut believes a lack of suitable solutions and understanding of the relief insurance can provide are the main reasons for this shortfall. “Traditional insurance solutions are not fit for purpose or adapted to local needs,” said the AXA man. “Traditional insurance often does not respond quickly enough to help,” he added. Mr Touffut noted that, for farmers in Africa, the cost of a drought can increase by 35 times if intervention is delayed by six months or more. Such a response is not uncommon with traditional insurance, he said. “But through technology, Africa will catch up on risk understanding and mitigation,” he said. He explained that tools exist today, with new technology and data-processing methods, to help African companies and individuals secure the insurance they need. “These developments are helping to produce new and well adapted insurance solutions,” saidMr Touffut. Parametric insurance is particularly well suited to Africa’s needs, he continued. Parametric insurance is based on the use of a parameter or trigger – typically rainfall, temperature or agricultural yield – that is correlated to damages or financial loss, such as agricultural damages and decrease in sales. Mr Touffut said parametric insurance has “numerous” advantages. There is no risk of anti-selection and no expertise is needed to trigger the indemnity. This in turn means that claims handling costs are lower than traditional insurance and claims payment is quicker, he said. Mr Touffut explained that during the past 60 years the quality of information provided by satellites, which can help monitor the triggers and damages used for parametric insurance, has greatly improved. Satellites will provide even more granular and abundant data in the future, he said. He pointed out that insurers can now use satellites to track moisture in the ground as a basis for parametric solutions. “Africa is already a laboratory for innovative insurance initiatives,” Mr Touffut told delegates. He gave three examples. In 1985, USAID developed the Famine Early Warning Systems (FEWS), following devastating famines in east and central Africa. FEWS provides objective analyses to help governments and humanitarian agencies predict and intervene in the face of humanitarian crises. Today, their system monitors drought and floods across the entire world through satellite images. Mr Touffut also flagged up the African Risk Capacity (ARC) – a successful macro-level innovation pushed for by the African Union. The ARC is a reinsurance pool to cover African populations against drought risks. It uses a model called Africa Risk View, which interprets different types of weather data, such as rainfall and information on crops, through satellite images. Then there is The World Bank’s Global Index Insurance Facility (GIIF), which brings innovative solutions to the African, Caribbean and Pacific zones. Mr Touffut explained that the collective goal of GIIF members is to develop parametric insurance as an agricultural risk management tool and contribute to food security. Through the GIIF, more than one million small farmers and pastoral workers have found protection, with in excess of $130m sums insured. AXA CS signed a partnership with the World Bank’s GIIF in February of last year to develop parametric insurance solutions for farmers in developing countries. Mr Touffut stressed, however, that technological advances alone are not enough to solve the problem of insurance in Africa. Enlightening farmers on the benefits of insurance is also necessary, he said.

Africa the new frontier for innovative insurance solutions

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