Insurance can bring solutions in tackling North African climate risk following COP26

A version of this article by MNK Re Group Chief Executive Manoj Kumar, was first published in Africa Ahead, on 2 November 2021

Whatever your views on the outcomes of COP26, the conference threw a spotlight on some of the most climate affected and vulnerable regions in the world.?This included North Africa, with leaders and campaigners stressing the impact climate change is already having on one of the region’s most critical sectors - agriculture.

Sessions at the conference discussed the link between climate change, food insecurity and hunger in the region and the President of the African Development Bank announced its "Mission 1 for 200," which aims to tackle the continent’s food insecurity and support farmers with climate resilient technologies.

Much of this had been anticipated a few months earlier at this year’s Sharm El Sheikh rendezvous, held in September. At the first physical gathering of North Africa and the Middle East’s insurance industry since the start of the pandemic, insurers and regulators focused heavily on the role insurance can play in combatting climate change.

The challenge is stark?

The danger, as the World Bank has set out and was echoed at COP, is that across North Africa and the Middle East, climate change is already making profound and irreversible changes to the region, and it will have a dramatic and damaging effect on agriculture in particular.?

Agriculture is of course a core element of many economies in North Africa. It contributes over 15% of Morocco’s GDP, employs around 45% of the Moroccan population and is one of the country’s main export industries.??It’s a similar picture in Tunisia, where it represents 14% of the economy and 20% of all jobs and in Egypt where it is 11% of GDP and 28% of employment.

The sector is also expected to play a major role in sustaining North Africa’s economic development.?In February 2020, the Government of Morocco launched a new plan, called “Generation Green,” setting out the strategy for the agriculture up to 2030.??It proposes to develop a new agricultural middle class, representing between 350,000 and 400,000 households, using one million hectares of collective lands with the expectation that it will create 350,000 jobs with a particular focus on high-value agriculture.??Such a change would lift the type of insurance cover that will be needed to one that is more viable for both insurers and governments to provide, by raising the value of crops to be covered and making them potentially individually or collectively insurable.

Alternative risk solutions such as parametric could help to build resilience?

These are big aspirations, but it’s clear that the insurance industry needs to back these plans with capacity and well-designed products; and a key issue is how the agricultural sector in particular can harness the innovation taking place in the insurance sector to deliver solutions through parametric insurance.

Discussions on climate change risk certainly dominated our own discussions with clients in Sharm El Sheikh and the interest in parametric products continues to grow.

The advances in data, analytics, enhanced satellite data and now the potentially game-changing introduction of blockchain technology have propelled parametric insurance into the limelight.??These products could have a transformational effect in closing the protection gap and protecting North Africa’s farming industry.

With parametric insurance it becomes possible for firms and individuals to obtain a solution for risks that have historically been uninsurable, thereby opening up the huge potential to get cover for the first time.?For North Africa, it could make?a significant contribution in minimising the risk exposures of its agricultural sector as well as providing greater stability to its economies as a whole.

The pace at which claims can be paid allows communities to recover more quickly than they would otherwise. As the policy is based on a verifiable trigger, it also allows us to achieve financing for customers with higher credit risks, who would normally have difficulty obtaining conventional coverage.

The other benefit is that the policies can be highly tailored, allowing clients to obtain the cover they need as well as include things that may not be insured by standard insurance policies.?

This gives the client a considerable amount of control, as they know that they’re claim will be delivered when something goes wrong.?The match with the aspirations of government such as Morocco to raise the value of the crops they grow could be near-perfect timing.

We all have a role to play?

Premiums will undoubtedly play a part in driving change.?The hardening market should provide further incentives to consider parametric products as they become increasingly competitive alternatives to traditional cover.

Governments and regulators in the region could also do more to help, through the establishment of disaster risk management funds, which could help to co-finance premium, manage insurance proceeds and combine resources to create catastrophe risk pools.?This could really accelerate the promotion and take up of parametric products.

The insurance industry is well placed to be an active partner and advise on how these could be constructed.?We have the expertise, the most up to date data and access to the all-important international capital required, given the serious capacity challenges of local markets, another key issue discussed at the rendezvous.

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 products are there, they are getting better and more sophisticated all the time and they can make a big difference, but the danger is that the opportunity is missed.?

As we head into 2022 and look ahead to COP27 in Egypt, North Africa will be even more in the spotlight.?If the region fails to embrace these alternative solutions, climate risk will only continue to wreak further destruction and the insurance gap will widen, leaving?more people and businesses exposed to losses they simply cannot withstand.?This in turn will make North Africa’s agricultural sector increasingly unviable.

We’ve all got our part to play in tackling what is quickly becoming an existential threat, the time to act is now.

It would be great to get your thoughts and perspectives of this issue, or if you would like to learn more about the services MNK Re offer, please feel free to leave comments or message us for more information.