Property & Casualty and the effects from climate change: How business models must adapt

A version of this article by Steven Oluoch, CEO of MNK Re Kenya and Lesley Kruger, Director – Business Development, was first published in the April edition of FA News.

The African P&C market is growing and there is a massive opportunity for insurers. The South African market, and sub-Saharan markets more generally, have seen a steady growth in both profitability and resilience. Improving per capita income has meant that there is an increasing market for insurance, and gross written premium per capita has been rising. Homeowner insurance and household content insurance have also performed well in recent years.

However, the market is currently facing challenges, and these will be made more complicated by climate change, the impacts of which have been underestimated so far. Rises in global temperatures are already demonstrably leading to an increase in catastrophic events, as heatwaves, prolonged droughts, floods, and rising sea levels result in a loss of life, property damage and population displacement. If not addressed, these problems will undermine the strength of the market and reduce insurers’ ability to see their clients through turbulent periods.

Flooding has been a particular problem in South Africa and has been a significant challenge for the market. Already this year, we have seen flooding in the Eastern Cape, with the Kruger National Park being severely affected and bridges on the Crocodile River being washed away.

The floods in KwaZulu-Natal destroyed both personal and commercial property, as well as causing a significant loss of life. One insurer reported that it was exposed to losses of up to R4.4bn. Scenarios, and insured losses, like this are going to become more likely and more expensive, not less, and the market needs to be properly prepared.

Insurers will have to adapt their business models to this new reality, by introducing new climate-specific products and services, reforming how they assess risk and helping customers to mitigate risk. If they can offer reliable protection against climate change, insurers will play a vital role in promoting economic stability. To do this, management needs to take climate change into account in all their decisions, so that they are constantly working to mitigate the systemic effects of climate change for their customers.

Increasing global temperatures will elevate the risk of systemic disruption, and insurers will need to reform their risk modelling so that it accounts for the growing number, type, and interconnectivity of risks. This is especially urgent for areas with a low penetration of property insurance (largely countries with developing economies), as otherwise insurers will fail to capture the full spectrum of potential losses by using low quality data.

New, innovative, and climate-focused products will be crucial to making climate risk manageable. Parametric insurance, where policyholders are insured against an event of a set magnitude, rather than the value of their losses, is one example that is already making a difference. It has been especially successful when used to protect those working in agriculture. A hybrid of traditional indemnity insurance coupled with a parametric solution provides an innovative solution to a challenge which is set to continue for the foreseeable future.

Insurers have helped their clients to mitigate risk for a long time, and climate risks should be treated no differently. This will require business models to move away from traditional risk transferring, and towards partnerships with customers. Incentivising certain behaviours, like using resilient materials in construction, through rebates is but one example of the ideas insurers should be looking at.

Property insurance is not the only insurance arena in which climate change is requiring clients to rethink their corporate governance and risk transfer coverages. The mining sector in particular needs to be aware of the increased liabilities they face, both in terms of increased operational costs and the effect of their mining operations on their environment, and ensure they have adequate Directors & Officers liability cover. Increasing regulatory adherence and sanctions for failing to comply with such legislation is one area where claims could possibly be brought against the directors and officers of a company by its shareholders.

The South African and sub-Saharan Africa P&C markets are now highly competitive, despite a tough macroeconomic environment and renewal season at the start of the year. International players have increased their presence and are creating competition for national insurers. However, to create sustainable businesses all of them will need to think carefully about how they will adapt to a world made riskier by climate change, and how they can continue to protect clients in that context.