Profit companies

Analysis: Africa’s warming threatens insurers’ quest for profit

  • Africa faces rapid and intense warming
  • Expanding insurers in vulnerable regions, businesses
  • Say innovative products, government support key
  • But managing climate risk remains a challenge

JOHANNESBURG, June 9 (Reuters) – The world’s biggest insurers are expanding into Africa, seeking to harness the growth promised by a growing population and middle class, but climate change could complicate their pursuit of profits.

With crowded Western markets, the continent offers a rare chance to grow.

In the United States, insurance premiums, including life insurance and general insurance, represent the equivalent of 12% of economic output or gross domestic product, according to Swiss Re. That’s about four times the level in Africa, based on African Insurance Organization estimates for 2019.

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However, the region is facing one of the fastest warmings in the world.

According to a report by the Intergovernmental Panel on Climate Change, temperatures in southern Africa have risen on average twice as fast as the global average in the five years to 2019.

Yet insurers are undeterred, with some seeking to expand even into vulnerable territories.

Global reinsurer Swiss Re (SRENH.S) wants to push further in Nigeria, including in the big city of Lagos, where sea waves are already threatening expensive real estate and poor slums. It is in talks with regulators there to change the rules to allow foreign reinsurance companies to write more business.

Peer Scor (SCOR.PA) wants to strengthen in agriculture, a sector very vulnerable to bad weather.

Other major African banks and insurers, including Standard Bank (SBKJ.J), Absa (ABGJ.J) and Sanlam (SLMJ.J) have also placed expansion into African markets at the heart of their strategies.

This will expose their portfolios to ever more climate risks. The companies said there are several ways to mitigate this, including working with customers to reduce the risks they face.

Peel an onion

Low levels of banking and insurance usage among the continent’s young, rapidly growing and increasingly affluent population means that Africa is seen as one of the most attractive and untapped financial services markets. in the world.

Before COVID-19, the insurance market in Africa was expected to grow at compound annual growth rates of 7% per year between 2020 and 2025 – nearly twice as fast as forecast for North America, three times that of Europe and better than the 7% predicted by Asia, according to McKinsey.

Insurers are already accounting for the cost of climate change elsewhere. In wildfire hotspots like California, they have retreated from cover. Read more

But in Africa, current low levels of penetration mean that massive economic losses from weather-related disasters are not yet reflected in credit and insurance portfolios.

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For global reinsurers, establishing a foothold on the continent is therefore a way to diversify their portfolio and hedge the climate risks they face elsewhere, Scor and Swiss Re said.

“A flood in Lagos or a drought in Kenya has no correlation with a tsunami in Japan,” said Beat Strebel, Swiss Re’s market director for Africa and the Middle East. This means that losses in one jurisdiction can be offset by premium income from another.

With the continent representing such a small part of its global business, the reinsurer had plenty of room for growth for decades, he said.

In Nigeria, for example, where floods have caused huge economic losses, P&C insurance penetration is only 0.3% of gross domestic product, he said.

Strebel stressed the importance of innovative products such as parametric insurance, which Scor said would also be key.

Parametric products use a single data point to trigger payments, avoiding costly adjuster visits.

Scor is running several pilot projects on the continent in the field of agricultural parametric insurance which could see it enter new markets in sub-Saharan Africa if successful.

However, insurers can run into problems.

The Kenya Livestock Insurance Program (KLIP) is one of the most prominent parametric schemes, winning accolades for paying tens of thousands of smallholder farmers when their livestock died due to drought.

The government subsidized the premiums to make it work. But Swiss Re, its main reinsurance funder, racked up years of losses on the program when the droughts were worse than expected.

In 2018, he told the Kenyan government it should rework the KLIP to make it more sustainable, by reducing the frequency with which it had to make the maximum overall payment, senior program official Richard Kyuma told Reuters.

Getting correct estimates of climate risk isn’t easy, McKinsey partner Antonio Grimaldi said, especially when it comes to its second-order effects on people’s willingness to live and work in an affected area. . African banks and insurers were the first to accept that this is something they have yet to fully understand.

“Climate risk is like peeling an onion, but the layers never end,” said Wendy Dobson of Standard Bank. “Just when we think we understand it, we realize we don’t.”

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Reporting by Emma Rumney; additional reporting by Carolyn Cohn in London and Duncan Miriri in Nairobi; edited by John O’Donnell and Emelia Sithole-Matarise

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