As a reinsurer, I take climate change seriously. I have no choice. Over 2017 and 2018, the global re/insurance industry paid out a staggering $219 billion in claims from weather-related events — the most expensive two-year period on record. In the wake of the devastating Tropical Cyclones Kenneth and Idai, the time has come to think more closely about how we are protecting Africa from both today's climate risks – and the potential future risks we face from climate change.
This will be a difficult discussion for insurers. For all the good work that is being done on the continent, the simple fact is that we have not developed our financial tools to a level that can deal with the current climate risks. Insurance penetration rates are simply too low and the lack of cohesion in the ecosystem means that too much of the financial burden is falling on the shoulders of governments, relief agencies, local businesses and citizens.
We must get better – and I believe we can.
The current situation
The $219 billion in losses covered by insurance in 2017 and 2018 is proof that insurance works – for those that have it. However, the figure masks the fact that an additional $280 billion of weather-related natural catastrophe losses were not insured and needed to be covered by governments, business and households. If those stakeholders couldn't pay, that economic value was simply lost.
Swiss Re's economists estimate that over the past 10 years globally, about 66% of all economic losses from natural catastrophes have not been insured. That's a huge protection gap – and nowhere is it more pronounced than in Africa.
For Cyclone Idai, for example, Swiss Re Institute recently reported that the overall economic loss for Mozambique, Malawi and Zimbabwe was in the order of $2 billion, of which only 7% will be covered by insurance. This is a 93% protection gap.
Such a situation shouldn't come as a surprise. At the macro level, we measure insurance penetration as the percentage of total insurance premiums in the total GDP. Global benchmarks show that developed economies have penetration rates of 7%-10% of GDP. In those emerging economies where insurance is starting to play a bigger role in supporting economic growth, this will be in the 3%-4% range.
South Africa's highly developed life insurance sector constitutes about 10% of the country’s total GDP, putting it on par with the UK or the US. If we add in the short-term insurance sector, then it is closer to 13%. Other than that, only Namibia, Morocco and Zimbabwe are above the 3% emerging economy benchmark, while only Kenya and Tunisia can be counted among those countries that have insurance penetration above 1%.
When measured in this way, the protection gap is rather abstract. However, the losses we cover are quite tangible. A tropical cyclone with its 200 km/h winds can remove the roof of a house or twist the metal frame of a warehouse. The resultant floods will wash away cars, houses and property. People will have no homes, no work and no income for as long as it takes to get the houses rebuilt and businesses up and running again. And if you don't have the money to make that happen, the protection gap becomes a very real problem.
Learning from 2019
Idai was a shock. The destruction was immense. So far this year, it is the deadliest natural catastrophe that we have recorded. Together with Cyclone Kenneth, this event has made it clear we need to reinvestigate the climate risks in southeast Africa.
Swiss Re's database has recorded tropical cyclones in the Indian Ocean basin from 1945 to 2016. When we visualise that data, we see that there is a band of high occurrence areas where tropical cyclones occur, running from just south of the Equator to just south of the tropic of Capricorn.
The historical meteorological data helps us understand the time intervals at which we can expect such events for Mozambique. A low-pressure system of similar intensity to Idai, for example, would have a return rate of about every 25 years. For the capital, Maputo, which is just outside the current strike zone, the return period is a little bit higher.
This tells us that, even without factoring in climate change, the climate risks are already within the lifespan of a mortgage and well within the lifespan of a piece of critical infrastructure such as an airport terminal or a new power plant.
In the future, we would expect the situation to worsen. There is clear evidence that the waters in the Indian Ocean are steadily warming. Although there are other factors that influence the severity of a tropical cyclone, the physics of global warming are well enough understood to tell us that warming oceans increase the probability of stronger winds, and more precipitation.
But the frustrating thing about risk is that we can never really be sure when and where it will actually hit. So, while we can reasonably expect a heightened risk, we are not entirely sure in what form. Will it mean more storms in total? Will it mean stronger storms? Or will it mean more impactful secondary perils, like rainfall and flooding?
One very worrying possibility is that Maputo's return period for Category 3 cyclones will become much closer to that 25-year period we see for the country as a whole. There simply isn't a solid enough foundation in place for mitigating climate risks, or for pre-financed financial protection via insurance or other forms of risk transfer.
The way forward
Although the protection gap is huge, this is not to say that nothing has been done in Africa, and we do have examples that work in the African context. The Kenyan Livestock Insurance Programme or the African Risk Capacity are two examples which are often cited as success stories.
However, in order to really upscale protection, we need to acknowledge that there is a whole economic ecosystem required to make insurance work. We need strongly capitalised insurers and reinsurers with a long-term commitment. We need sound regulatory frameworks. We need non-insurance stakeholders such as city planners, who can build mitigating strategies into their work. And we need a financially literate consumer base that is aware of insurance, its purpose, its value and its limitations.
This is why we need to build on the dialogue with regulators, insurance associations, NGOs and the broader public sector stakeholder community in the region to better anticipate and prepare for an evolving risk landscape. The global re/insurance industry needs to strengthen the way it channels its knowledge into the region, and how it enables the development of stronger financial tools. We need to accelerate the work being done to develop effective distribution channels, especially via bancassurance and mobile insurance.
We are doing a lot, but we need to do more. I think we can get it right. And if we do, it will mean a more resilient Africa in the face of increased climate risks.