Climate chaos, premium pain: Cost of climate change on insurance costs

Gabin Omanga is a certified member of the Institute of Risk Management, (IRM) East Africa Chapter. [Courtesy]

In April, Kenya experienced the worst floods in decades after heavy rainfall in most parts of Kenya.

As that was happening, the weatherman warned of a looming cyclone along the East African coastline. Tropical storm Lyla, then hit the coastline a few days later killing two and destroying infrastructure.

While the immediate physical damage was evident, the ripple effects will be felt later and for a longer time. One of them is the increase in insurance premiums (amounts paid to insurance companies for cover against risks such as loss or damage of assets like cars and property).

Insurance works on the principle of risk assessment. Premiums are calculated based on the likelihood of risks occurring and the potential cost of loss or damage.

With the effects of global warming, studies suggest that extreme weather including floods, storms, and cyclones will become more frequent and severe. As a result, insurance claims will increase in both frequency and potential claims.

After the floods in Kenya, insurance companies now face claims for damaged businesses and buildings. They also have to deal with claims from motor vehicle owners. 

These extreme weather cases will only get worse. Noting this, Insurance companies will have to adjust their pricing models. The result will be a significant rise in insurance premiums for policies covering vehicles, homes, and businesses.

For many Kenyans, insurance costs are already highly prohibitive. Yet, car owners, already grappling with the economic challenges brought about by the global economic shocks, now face higher premiums to insure their vehicles.

The impact of the rising premiums extends beyond individual policyholders. The insurance sector as a whole is experiencing stunted growth. According to the Association of Kenya Insurers (AKI), insurance penetration is only 2.33 per cent of GDP. It was 2.31 per cent 5 years ago.

Higher premiums deter new customers from purchasing insurance policies, while existing customers may choose to reduce coverage or drop their policies altogether. This shrinking customer base limits the potential for growth in the industry.

To address the effects of climate change on insurance premiums, it is essential to invest in flood mitigation infrastructure, such as improved drainage systems and flood barriers. More drastic measures like road closures on the advice of the Meteorological Department should be considered. Additionally, the government could consider establishing a national disaster insurance fund to subsidise premiums for high-risk areas, making insurance more affordable and accessible.

The writer is a certified member of the Institute of Risk Management, (IRM) East Africa Chapter