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Flood risk in Africa: an insurable peril

By:  Caspar Honegger, Head of Flood, Swiss Re

Caspar Honegger, Head of Flood, Swiss Re, spoke to Tony van Niekerk about flood risks and the need for insurance in Africa.

The economic cost of natural catastrophes has clearly risen. We see this trend in Africa and we see it for all weather-related natural catastrophes, including floods. The increase is mainly due to economic development and population growth. These are two very welcome developments for society as a whole. Growing markets and economies mean that people are getting wealthier. It also puts a higher concentration of assets in exposed areas. When we add the effects of climate change to the mix, then the impacts of floods and storms will only increase.

A functioning insurance system is essential to secure economic growth in the face of natural catastrophes. Currently only about 70% of all natural catastrophe losses are covered by prefunded insurance programmes. In the emerging and developing economies of the world, this can be as little as 1%. Without insurance, governments, businesses and private individuals are left with the costs of rebuilding and restoring communities. In countries where governments, business and citizens may not have the hundreds of millions of dollars needed, then the wealth is often literally washed away.

When it comes to closing the protection gap, the creation of a sound insurance system for floods must be a top priority. No other natural catastrophe affects as many people as flooding. An estimated 500 million people are affected every year across all parts of the globe. In fact, flooding has caused the majority of economic damages and loss of life in Africa over the past 20 years.

Although Africa faces a variety of natural catastrophe risks, river flood is ahead of earthquake and drought as the most severe natural hazards. The main issue with flooding is simply that it can happen in almost every region of Africa. Earthquakes threaten large areas within the seismically active areas around the Mediterranean Sea and along the African rift system, from Cairo down to Tanzania. Tropical cyclones are a risk to communities along the southeastern coastline. Floods on the other hand can occur across the continent.

Overall flood risk in Africa is very similar to EU and US and therefore not significantly higher or lower. However, we do not see the very large economic losses here. All countries have flood risks with the issue being more around the management of the risk. China has invested significantly in measures to limit these risks. Risk management efforts are usually driven by large events prompting governments to act. Floods have a large man-made element and therefore protection measures can influence the severity of the event greatly.

Penetration is very low in Africa with sales being mostly in industrial and commercial environments. On a personal insurance level it is very low. Building knowledge on assessing flood risk and building appropriate products is a focus and mandate for Africa. This should assist with better understanding of the risk, more accurate pricing and also increased risk awareness. People should understand that even though it does not happen frequently, it is still a risk.

Globally, insurance penetration for flood damage is also very low. Australia for example has, after the 2011 flood event, started making bigger gains in flood insurance penetration with the government there indicating that it is essential for insurers to increase flood insurance penetration in Australia.

One of the ironies of closing the protection gap is that there is clearly no lack of demand for flood insurance. However, flooding has traditionally been seen as uninsurable. This is because flood risk-assessment has been poor and the information needed to estimate individual, risk-adequate premiums has been lacking.

Insurance only works when risk is shared among a critical mass of policyholders. However, in the case of flooding, not all properties are in risk areas. For this reason, insurers either have to charge premiums that would be unaffordable for most people or, as often the case, decide not to insure flood risk at all.

The key to solving this problem is sophisticated risk assessment. Flood risk modelling is complex and requires detailed information on topography and climate. Nevertheless, technological advancements in the last 10-15 years have helped improve underwriting with the availability of digital elevation models, modelling capabilities and computing power. In recent years, flood maps and flood risk models have been developed for an increasing number of countries.

They are a necessity for selective underwriting and adequate pricing given the high spatial hazard gradient of flood risk. Swiss Re Global Flood Zones, for example, provides a powerful tool for risk selection and to develop flood solutions for single locations or portfolios and we have committed to sharing this expertise with our clients in Africa.

It is possible to widen the boundaries of insurability through exclusions, limits, self-retention schemes, the bundling of products, new forms of risk transfer, the creation of pools and innovative public-private partnerships.
Most importantly, it is necessary to build a broad-based risk community.

A large community can be built in two ways: by offering a comprehensive natural perils package or by making flood insurance mandatory. This may mean merging a high-risk flood community with lesser-exposed groups, and with communities facing other perils as a means to diversify the risk. Combining natural perils with fire coverage increases the size of the risk community, therefore often making the package more affordable.

The expansion to flood is an opportunity for insurers in Africa to address a gap in current coverage and better serve their clients. Providing flood insurance coverage will help the many insureds who experience floods and will bring the peace of mind and financial security of insurance protection for flood to all insureds.

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