Risks related to climate change pose a serious threat to Kenya’s social and economic development.
Extreme climate events such as floods and drought could potentially impact 2.4 percent of the gross domestic product (GDP) per annum.
The ongoing drought has exposed the vulnerability of our agricultural sector. This is seen in the recent GDP data that shows the sector’s contribution has fallen below 20 percent.
Research by McKinsey, a global consulting firm, shows that the value at stake from climate risks will double by 2050. To some extent, it is already happening as the World Property & Casualty (P&C) Insurance Report 2022, found that the insured losses from natural catastrophes have increased 250 percent in the last 30 years.
Developing countries like Kenya are especially vulnerable due to their low-income population and lack of resources.
This calls for a three-pronged response to climate change.
First, the response by the industry should be to recognise climate change as a key business issue and incorporate it into short- and long-term strategies.
Secondly, the more direct response can be to offer climate insurance products, especially to protect our vulnerable sectors. In this regard, the government has put in place crop and livestock insurance programmes.
The third response can be to act as a catalyst through investment and underwriting practices. Insurers play an important role in the development of capital markets by pooling public funds.
Insurers can try to direct these investments into green assets by promoting sustainable and low-carbon businesses.
Similarly, insurers can support businesses to enhance their resilience through underwriting policies.
Low carbon-based businesses can be encouraged through favourable underwriting practices.
Climate change will manifest its worst effects in developing countries like Kenya. Therefore, every sector must play its role in managing climate risk.
While insurers may not play a central role, they have a critical role to play in mitigating climate risk.
If the Kenyan insurance industry prepares well to respond to climate change, it will benefit the economy as well as its most vulnerable citizens.
This recognition is still at an early stage, as a study by the Geneva Association found only 38 per cent of the participating global insurance companies consider it as a core business issue.
This number will be even lower for the insurance sector in Kenya. Therefore, coordination between multiple stakeholders including industry bodies (insurers, brokers, and agents), regulators and the government is needed to prioritize this issue.
Only then, will the sector start looking at the threats and opportunities presented by climate risks.
The World Bank is also promoting drought insurance for pastoralists through its DRIVE project. However, the potential is largely untapped and requires more participation from the industry.
The regulator also needs to play a proactive role by facilitating capacity building for insurers to offer climate and parametric insurance products.
These products need not be limited to agriculture and livestock but can also target biodiversity and green energy sectors.
The third response can be to act as a catalyst through investment and underwriting practices. Insurers play an important role in the development of capital markets by pooling public funds.
Insurers can try to direct these investments into green assets by promoting sustainable and low-carbon businesses. Similarly, insurers can support businesses to enhance their resilience through underwriting policies.
Low carbon-based businesses can be encouraged through favourable underwriting practices.
Banks have already started to play an active role as demonstrated by The Kenya Commercial Bank (KCB) which has issued Sh336 billion in green loans over the last one-year to support such projects.
Insurers can play a similar role through their investment and underwriting decisions as well.
Sharma is the Director of Emerging Consumers at Britam Holdings Plc.
