A version of this CPD article was first published in the February 2025 edition of FA News.

Climate change is one of the most significant challenges of the 21st century and with the crisis continuing to escalate, extreme weather events are becoming more and more common. Africa specifically, loses up to 15% of its gross domestic product per capita every year due to climate change. Furthermore, the World Bank predicts that by 2050, climate change could force over 85 million Africans to migrate within their own countries due to its impact on resources and liveability.

As a result, climate adaption and mitigation will be essential for countries across the continent. Adaption focuses on adjusting policies, infrastructure and systems to decrease risk and the impact of climate change on individuals, businesses and economies. In contrast, mitigation involves reducing greenhouse gas emissions by slowing the rate of climate change, tackling the root cause through renewable energy projects and energy efficiency initiatives. For the insurance and reinsurance sectors, it will be important to find the right balance between the two, with adaption providing immediate resilience and mitigation helping reduce long-term climate risks.

In recent years, South Africa has seen the April 2022 KwaZulu-Natal floods, which was one of the costliest natural disasters on record for the country, with $3.6 billion (67 billion ZAR) in economic losses and $1.8 billion (34 billion ZAR) in insured losses. Coupled with this, drought continues to increase in severity and number, greatly impacting the agricultural sector and food security.

In response, insurance and reinsurance brokers have helped to improve climate adaption. Most notably, parametric insurance is one of the products that has seen rapid growth, ensuring that vulnerable communities are quickly and fairly paid out after catastrophes. As the parametric approach offers payouts based on pre-determined climate-related parameters, including weather data, the payout can be with the customer almost immediately. This has allowed farmers across Africa to receive rapid financial relief during droughts, particularly helping small farmers in remote areas where access is limited. With the increase in climate-related risks, this will form an essential part of climate adaption in the years to come.

Coupled with this, we have seen an increase in the adoption of drought-resilient crops and advanced technologies, such as soil moisture sensors and satellite-based crop monitoring, helping to optimise water usage, improve yields and reduce exposure to climate risks. In the Limpopo region in South Africa, for example, a pilot programme by local insurers and agri-tech businesses has helped farmers adopt sustainable irrigation systems, leading to a reduction in crop losses during the 2019 drought.

In order to tackle the causes of climate change, however, mitigation is needed alongside adaption. The insurance sector can play an important role in driving clean growth and enabling the transition to a low-carbon economy. Most notably, South Africa’s Renewable Energy Independent Power Producer Procurement Programme (REIPPP) has driven investment in wind and solar energy projects in recent years. Brokers can offer specialised coverage for these renewable energy projects, particularly construction risk insurance and operational liability coverage, protecting developers from risks including equipment failure, natural hazards and delays in completion.

However, according to the United Nations Environment Programme (UNEP), Africa receives only about 3% of global climate finance, which is not enough for meeting the continent’s mitigation targets. The International Energy Agency (IEA) estimates that transitioning Africa’s energy sector will require an investment of about $2.6 trillion (49 trillion ZAR) by 2040. Wealthier nations therefore have an equally important role in supporting Africa’s climate mitigation targets, most notably through funding and partnerships.

It is therefore clear that for the insurance sector, a balanced strategy is needed when it comes to adaption and mitigation. Adaption must be the foundation, ensuring that agricultural resilience is maximised, essential to reducing climate risk. Mitigation, on the other hand, will provide future stability, reducing the rate of extreme-weather events. Both provide important opportunities for partnerships with governments, farmers and NGOs to drive large-scale adaption and mitigation initiatives.

You can read the original article on the FA News website