Analysis: The warming of Africa threatens insurers’ pursuit of profit

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  • Africa is facing rapid, intense warming
  • Insurers expanding in vulnerable regions, lines of business
  • Say innovative products, key to government support
  • But managing climate risk remains a challenge

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

With Western markets overcrowded, the continent offers a rare growth opportunity.

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

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However, the region is facing some of the fastest warming in the world.

Temperatures in southern Africa rose on average twice as fast as the world in the five years leading up to 2019, according to a report by the Intergovernmental Panel on Climate Change.

But insurers are undeterred, and some are even trying to expand into vulnerable areas.

Global reinsurer Swiss Re (SRENH.S) plans to expand further into Nigeria, including in the city of Lagos, where ocean tides are already threatening expensive real estate and impoverished slums. She 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 build up in agriculture – a sector highly vulnerable to extreme weather conditions.

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 exposes their portfolios to more and more climate risks. The companies said there were several ways to mitigate this, including working with customers to reduce the risks they face.

PEELING AN ONION

Due to low acceptance of banking and insurance among the continent’s young, fast-growing and increasingly affluent population, Africa is considered one of the most attractive untapped financial services markets in the world.

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

Insurers are already calculating the costs of climate change elsewhere. In hotspots like California, they have withdrawn from cover. Continue reading

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

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For global reinsurers, therefore, building up on the continent is 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 nothing to do with a tsunami in Japan,” said Beat Strebel, Swiss Re’s market executive for Africa and the Middle East. In this way, losses in one area can be offset by premium income in another.

Because the continent accounts for such a small part of its global business, the reinsurer has ample room to grow for decades to come, he said.

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

Strebel pointed to the importance of innovative products like parametric insurance, which Scor said would also be critical.

Parametric products use a single data point to trigger payouts, eliminating costly claims adjuster visits.

Scor is conducting several agricultural parametric insurance pilot projects on the continent which, if successful, could allow entry into new sub-Saharan African markets.

Still, insurers can get into trouble.

The Kenya Livestock Insurance Program (KLIP) is one of the best-known parametric programs, earning praise for paying out tens of thousands of smallholder farmers when their livestock have died from drought.

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

In 2018, it told the Kenyan government that it needed to revise KLIP to make it more sustainable by reducing the frequency of the maximum total payout, the program’s top official, Richard Kyuma, told Reuters.

Assessing climate risk is not easy, McKinsey partner Antonio Grimaldi said, especially when it comes to second-order effects on people’s willingness to live and work in an affected area. African banks and insurers were the first to accept this, which they still don’t 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 get it, we find we don’t.”

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

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