Why Climate change could leave business owners underinsured

By Steve UMIDHA

Unpredictable weather patterns could leave business owners underinsured – which is when the cost of a major loss exceeds the sum covered by the insurer.

Industry experts warned yesterday, that unless climate risk policies are urgently put in place, policyholders and underwriters alike, risk exposure to abnormal weather- elicited losses.

“Nowhere is this more apparent than in Sub-Saharan Africa, where countries will face some of the largest global exposure while having minimal capacity to respond.

The most glaring challenge is the level of uninsured assets and livelihoods in these very vulnerable countries,” warned Dr. Al Hamdou Dorsouma – the director of Climate change and Green Growth, African Development Bank (AfDB).

In a speech read on his behalf at the ongoing AIO Conference and Annual General Assembly in Nairobi– Dorsouma rallied calls sounded by executives running large corporations to introduce carbon pricing to provide the private sector with clarity and stability – if the sector is to survive the global warning.

“This calls for urgent and bold actions from all of us,” he noted.

Financial losses caused by adverse weather that did not seem material enough even a decade ago – must now be closely monitored and managed with weather-based financial instruments, according to National Treasury and Planning, CAS Erickson Simiyu.

“The insurance industry has a critical role to play in helping companies and nations manage, measure and reduce the impact of climate change. I challenge insurers and reinsurers and other players in the sector to play their rightful role in championing and promoting environmental sustainability,” he noted.

The said instruments are however not new according to an assessment by Harvard Business Review, which state that such instruments were first introduced in 1997 in the energy sector, to automatically compensate investors for financial losses when the weather index exceeds a predefined level – but have largely been ignored in other sectors like insurance.

“They work like any other traditional hedging instruments except that the index on which they are settled is a weather index.

The index can be average temperature thresholds, rainfall levels, wind speeds or any combination of variables that represent the risk to which the business is exposed,” reads an excerpt from the platform, which also noted that such payments are triggered by and linked to the weather index, not the actual financial loss incurred by the business.

This follows the latest report of the Intergovernmental Panel on Climate Change (IPCC) – the flagship climate science survey, which shows that African countries – Kenya included, are expected to face overlapping risks, where they will have reduced food production, reduced fisheries production, increasing heat related mortality, heat related loss of labor productivity, and flooding from sea-level rise.

Indeed, a warming planet naturally creates a wide range of risks for businesses, from disrupted supply chains to rising insurance costs to labor challenges. Such incurred losses are shared through premiums collected by the insurer from all the insured – those that may not suffer any loss to those who have large losses. Such losses are shared by all the risk exposures who are part of the pool.

Encouragingly, there have been efforts in framing climate risk covers with the Crop Index Insurance Programme (CIIP) which combines the implementation of two technological innovations in climate risk insurance, soil moisture index insurance and a picture-based loss verification tool, on its pilot stage in Kenya today.

Growing demand for such products shows the finance and insurance sectors have a crucial role to play in enhancing resilience in the largely crop-growing and pastoralist communities that drive the country’s agriculture, which is the backbone of the economy.