South Africa embraces innovation to tackle climate crisis

A version of this article by MNK Re’s Head of Innovation, Harry Titherley, was first published in the February edition of FA News. 

As discussed at the recent COP26 conference in Glasgow, weather-related risks are becoming a more menacing part of life on the continent, threatening many of the lifeblood sectors of African economies. Climate change is already making profound and irreversible changes to the region and the insurance market is working to develop solutions for this changing environment.

Recent government and regulatory action in South Africa show how officials are taking seriously the value of parametric products and index insurance through a new subsidy scheme which could finally open up new possibilities.

Increasing prevalence of drought in parts of sub-Saharan Africa has made the situation in the region is particularly dire for farmers. South Africa’s agricultural sector is driving its economic development, showing the best growth rate of all sectors, at just over 13% in 2020. However, the industry remains extremely vulnerable to the growing impact of the climate crisis. 

This problem is compounded by the lack of cover in the region. The cost of insurance is increasingly unaffordable for farmers, leaving only 20% of the country’s commercial grain farmers with any kind of drought insurance, according to the South African Insurance Association.

This situation has forced the country’s government and regulators to look at alternative solutions.  The South African Government recently announced a 10-year ZAR 2.2 billion public-private state subsidy scheme to try and address the issue of drought insurance for the agricultural community.  Grain, oilseed or livestock farms are now being offered weather index-based insurance with the state paying as much as 75% of the premiums for smallholders.

Index Insurance is, however, a relatively new product in South Africa, and therefore is not yet authorised by the regulators. Since July it has been undergoing a testing phase through the Intergovernmental Fintech Working Group (IFWG), South Africa’s regulatory sandbox.

The subject of the pilot is non-life insurer Santam’s Soil Moisture Index. Measured via satellite, this scheme seeks to provide relief to policyholders when the index drops below a certain level during periods of drought. The technology used should help to improve the risk profiling of the country and initiate measures towards the sustainability of the industry.

Initiatives like these, alongside the integration and availability of digital technology, open up opportunities for sub-Saharan African insurers.

At MNK Re we’re looking closely at the South African scheme. We’re following the results of the regulatory pilot as they emerge and are already working through with our clients how they can make full use of what is on offer.  The partnership element to the scheme will also be critical, the industry is highly experienced in designing and implementing weather index-based insurance schemes and should be able to bring this experience to bear in successfully delivering the South African Government’s ambitions.

But why stop at drought?  We can leverage the latest technological developments to address excessive wet periods, hurricane damage, or extreme heat. We’re currently working on a project in Mozambique to help clients manage tropical cyclone risks.  Local insurance markets on their own can’t deliver the coverage needed, but with the right partners with access to the right data and technology, the options are growing.

Ultimately, it’s the farmers who benefit.  Parametric is designed to be transparent, using third-party, independent data. This gives the client a considerable amount of control, as they know that their claim will be delivered when something goes wrong. The pace at which claims can be paid also allows communities to recover more quickly than they would otherwise.

At MNK Re we’ve seen first-hand the difference these products can make on the ground providing the financial certainty needed to undertake business with confidence, knowing that they have cover in place should disaster strike. The decisions made by governments and regulators could be serious gamechanger for this highly threatened part of the world.