Despite increasing climate threats in Africa, demand for climate risk insurance is still low on the continent. This is due to the high prices of insurance premiums, insurers' inability to offer attractive products, and consumers' unawareness of the existing solutions.

In mid-2022, Faber Consulting and the African Insurance Organization published the 2022 edition of the report "African Insurance Pulse." The report was focused on the impact of climate change on the African insurance sector and was based "on interviews with senior executives from insurers, reinsurers, and brokers operating in Africa."

According to 92.3% of the executives interviewed, in recent years, Africa has recorded an increase in the frequency of climate disasters.

The executives identified four dominant risks on the continent. They are namely cyclones (especially in Mauritius, Madagascar, and Mozambique), floods (especially in West and East Africa), forest fires (North Africa mainly), and hailstorms (in Southern Africa).

Respondents (84.6%) observed an increase in the severity of these extreme events, including tropical storms and flooding. The reasons cited to explain the increase in flooding include increasing urbanization that reduces soils' capacity to absorb rainfall with the impervious surfaces such as roads and sidewalks as well as the numerous houses built. In addition, large African cities are often built on the banks of rivers or near the coastline, exacerbating the problem.

When interviewed about the main weather hazards their markets are exposed to, respondents cited floods (100%), droughts (84.6%), heavy rains (73%), and tropical cyclones (57%).

Concerning the demand for insurance covering extreme weather events, they all responded that the demand was not "very high". Nevertheless, 40% of them said demand for coverage against extreme weather events is relatively high from large commercial and industrial companies and in markets where climate risk insurance is mandatory.

Demand from individuals (36% of responses) and SMEs (24%) is relatively low due to a combination of factors that include affordability, unawareness about the existing products, and accessibility.

Affordability is the most commonly cited limiting factor, but it is not the only reason for the low demand. Indeed people are often unaware of existing solutions, do not have access to them, or are overwhelmed by the complexity of some products.

Another striking factor is insurers' inability to develop attractive and relevant products.

Increase in climate risk insurance premiums

The study reveals that the average African consumer is very price sensitive and therefore has limited willingness to pay for climate risk insurance. Only 11.5% of executives of companies operating in the African insurance sector say that individual customers are able and willing to pay for climate change coverage.

The executives interviewed also indicate that 57% of commercial clients (companies) are able and willing to pay for climate risk protection, noting, however, that the price sensitivity varies greatly between multinationals and SMEs.

Regarding the cost of weather risk coverage, 60.8% of respondents say that rates have increased over the past three years, 30.4% say they have remained stable and 8.7% say they have decreased.

Most of the respondents explained that the premiums prices increased by less than 10 percent. In South Africa and Kenya however, the premiums increased by 20% or more.

The study also reveals that despite being the least contributor to climate, Africa is one of the regions of the world most affected by natural disasters and most exposed to the effects of climate change. In 2019, five African countries were among the ten most affected by climate change in the world. They were Mozambique (1st), Zimbabwe (2nd), Malawi (5th), South Sudan (8th), and Niger (9th).

According to the World Meteorological Organization, between 1970 and 2019, in Africa, 1,695 natural disasters claimed 731,747 lives and caused an estimated US$38.5 billion in economic losses.

But for insurers, climate change is both a threat and an opportunity for the sector; 100% of the executives interviewed believe climate change presents new opportunities in their markets. One of the opportunities is coverage for the many renewable energy investment projects supported by international donors and African financial institutions. They also cited the significant insurance gap resulting from climate change and natural hazards, which insurers can benefit from by offering coverage that is better adapted to the risk (crop insurance, livestock insurance) and the financial capacities of consumers (parametric insurance, micro-insurance).