Insurance as a mechanism for building climate resilience

In August 2021, the United Nations Secretary General, Antonio Guterres termed the climate crisis a code red for humanity; one of the greatest existential threats facing the world today. The warning signs are all too clear to see. Extreme weather events ranging from soaring temperatures to excessive flooding as well as diminishing flora and fauna are but some of the indicators of this global crisis of our times. Africa is bearing the brunt of climate change, with 30 out of the world's 40 most climate-vulnerable countries being in sub-Saharan Africa, according to research by the University of Notre Dame. This is especially true considering that Africa is highly dependent on its natural resources - be it its farmlands or its wildlife. The drought that swept the Horn of Africa region between 2020 and 2022 bears witness to the severity of the climate change crisis facing the continent. And as the frequency and severity of weather events associated with climate change intensify, a lot is at stake as the cost of climate disasters could wipe out livelihoods for hundreds of millions of Africans. It is worrying though that only three per cent of global climate finance finds its way to Africa to drive mitigation and adaptation to climate change, according to the Climate Policy Initiative. At the same time, there is also a large protection gap with a very low percentage of African weather-related losses currently being insured. A specific example is Cyclone Idai which affected Mozambique, Malawi, and Zimbabwe in 2019. According to the Swiss Re Institute, only seven per cent of the estimated losses to the tune of $2 billion (Sh306 billion) were covered by insurance. The insurance industry can play a vital role in responding to the climate change crisis by driving both mitigation and adaptation to climate change in various ways. First, insurance companies are experts in assessing risks. They can use their knowledge and data to analyse the potential impacts of climate change on various sectors and help governments and communities understand the risks they face. By quantifying the potential financial losses, insurance can provide a clear indicator of the severity of the risks, helping to prioritise resilience efforts. Insurance companies can also incorporate climate risks into their pricing models. By charging higher premiums for areas exposed to greater climate risks, insurance incentivises individuals and businesses to take measures to reduce their vulnerability. This can help drive investment in climate resilience measures such as retrofitting buildings to withstand extreme weather events or adopting sustainable farming practices. Insurers can also play an active role in risk reduction and prevention. They can offer risk management services, guiding how to mitigate the effects of climate change. This can include suggestions for adaptation measures, such as implementing flood prevention infrastructure or diversifying crop portfolios to reduce vulnerability to climate-related agricultural risks. As risk advisors, insurance companies can contribute to building climate resilience by sharing their expertise and data with governments, communities, and other stakeholders. By providing information on best practices and lessons learned from previous incidents and disasters, they can help inform decision-making and improve the resilience of communities and infrastructure. Ultimately, insurance provides financial protection against climate-related losses. By offering coverage against weather-related damages, businesses and individuals can recover more quickly from climate events, reducing the overall economic and social impacts. This financial safety net can help promote economic stability and ensure the continuity of vital services and industries. Insurance has proved to be a useful tool in mitigating crop and livestock losses in Africa as shown by the growing adoption of agricultural insurance tools. Insurance companies manage vast investment portfolios. By integrating climate change considerations into their investment strategies, insurers can redirect capital towards climate-resilient projects and industries. As managers of significant pools of long-term capital, insurers can play a critical role in the transition to a net-zero emissions economy through green investing. This can contribute to the development of climate-resilient infrastructure, technologies, and practices, thereby promoting long-term sustainability and resilience. By leveraging their expertise and incorporating climate risk modelling in decision-making, insurance companies can play a critical role in promoting climate resilience at various levels, from individual households to entire economies. This way, insurance companies can help households, businesses, and governments make sound and informed decisions on what resilience initiatives to pursue. The writer is the General Manager - Reinsurance at Minet Kenya

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