Risks of climate change offer insurers new cash flows

Industry

Risks of climate change offer insurers new cash flows


A driver and motorist wade through a flooded Nakuru-Eldoret-Malaba highway in the town of Eldoret, Uasin Gishu county, after heavy rains, July 21, 2022. PHOTO | JARED NYATAYA | NMG

Insurance policies targeting damage from climate risks such as drought, floods and extreme heat represent the next growth opportunity for Kenya‘s underperforming insurance sector, experts say.

Industry insiders say the industry is looking into developing products that include coverage against the increasing risks associated with climate change for public infrastructure, agriculture, healthcare, energy, tourism and forestry.

Although African countries, including Kenya, produce less than 5 percent of carbon emissions – the world’s lowest – they are the most vulnerable to climatic instabilities such as drought, floods, rising sea levels and rising temperatures.

That represents a growth opportunity for insurance companies in a country where penetration has fallen below 2.5 percent of gross domestic product, according to insurance broker Minet Kenya.

“Many of our risk assessments have not taken climate change into account. But today, in places where there has never been a flood, you will find that a flood has swept away a road, bridge or rail,” said Sammy Muthui, Managing Director of Minet Kenya, in an interview.

“We also need to address medical responses related to climate change, as air pollution, rising temperatures, flooding and drought will increase the risk of some diseases.”

The developments come at a time when the world is grappling with extreme weather conditions such as fresh water shortages, rising temperatures and the extinction of plant and animal species, which are mainly associated with greenhouse gas emissions in developed countries.

The UK Government-backed Financial Sector Deepening (FSD) Africa has identified the insurance sector as a key element in helping Kenya mitigate and adapt to climate change-related risks in Kenya.

“As insurers, insurers play an essential role in facilitating the flow of capital to mitigation projects by providing risk mitigation solutions to investors. For example, investors in the geothermal sector in East Africa, where capital-intensive early-stage development drilling has a low-probability, high-severity risk profile, need risk-transfer solutions to make the risk-reward profile attractive,” wrote FSD Africa in a July 2021 article on its website .

“To remove this obstacle, FSD Africa is working to establish a local underwriting pool that will provide risk mitigation solutions to enable the onboarding of private capital into this important renewable energy source.”

Financing climate risks and implementing ESG (environmental social and governance) standards for insurers was the main topic when industry regulators, insurers, reinsurers, brokers and representatives from the continent met in Nairobi at the end of June.

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