Country: Ethiopia

African insurers take up climate change fight with $14 bln pledge

Posted on by TIMOTHYRADIER

Summary

  • 85 insurers make pledge to extend climate cover
  • Comes as COP27 talks focus on issue of loss & damage
  • African Climate Risk Facility to cover 1.4 bln people

SHARM EL-SHEIKH, Nov 9 (Reuters) – A group of over 85 insurers in Africa has pledged to create a financing facility to provide $14 billion of cover to help the continent’s most vulnerable communities deal with climate disaster risks such as floods and droughts.

The commitment to create the African Climate Risk Facility (ACRF) was made on Wednesday during the COP27 climate talks comes as developing countries push their richer peers to do more to help them pay for the costs of responding to such events.

Demand for compensation for the “loss and damage” caused by global warming has long been rejected by wealthy countries, whose leaders are wary of accepting liability for the emissions driving climate change.

Africa, which accounts for less than 4% of greenhouse gas emissions, has long been expected to be severely impacted by climate change.

Against that backdrop, the African insurance plan is based around creating a scalable, local market-based funding tool to help countries better manage the financial risk of climate shocks and increase the resilience of its more vulnerable communities, the group said in a statement.

“This is the African insurance industry saying let’s come together and try and solve this ourselves,” said Kelvin Massingham, director risk and resilience at FSD Africa, one of the partners behind the launch.

“We have a massive risk gap in Africa and existing solutions aren’t working,” Massingham said. FSD Africa is a UK government-backed development group.

The ACRF will provide protection for 1.4 billion people against floods, droughts and tropical cyclones by providing $14 billion of climate risk insurance by 2030 to African sovereigns, cities, humanitarian organisations and NGOs, the insurers said.

The group is calling for $900 million in funding from development partners and philanthropies to support the project, much of which will go towards providing a subsidy on the cost of the premium to help governments and cities with limited fiscal resources buy the cover.

These donor funds will be held in a trust and managed by the African Development Bank.

“The facility will enable us to cover certain risks like floods, cyclones and droughts…and to help us mitigate the risks we face as underwriters dealing with these climate risks,” said Philip Lopokoiyit, chief executive at Nairobi-based insurer ICEA LION Group.

The insurance commitment is the first from the 85 signatories of the Nairobi Declaration on Sustainable Insurance, signed in April 2021 by the industry to support the U.N. Sustainable Development Goals.

The ACRF will provide a domestically funded alternative to global initiatives like the World Bank’s Global Risk Financing Facility and the Global Shield Financing Facility, a new funding facility that will help countries that suffer heavy economic loss due to climate change-driven disasters, announced by World Bank president David Malpass on Tuesday.

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Climate finance innovation for Africa

The African continent presents a massive investment opportunity for investors to advance climate solutions in the coming decade, however, a set of barriers to finance have stifled requisite investment to date. In this new report, in collaboration with Climate Finance Innovation for Africa and Climate Policy Initiative, we provide a framework for how innovation in financing structures can leverage strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

This paper focuses primarily on climate mitigation, which represents the largest investment opportunity for private investors. We refer audiences focused specifically on adaptation to the work done by the Global Center on Adaptation and Climate Policy Initiative on Financial Innovation for Climate Adaptation in Africa.

Insurance innovation portrait – Ethiopia

This report sketches an insurance innovation portrait for Ethiopia. It forms part of an eight-country study to determine what regulators can do to unlock innovation at scale and meet key insurance needs in sub-Saharan Africa.

Sector expansion and development defined by 1990s liberalisation. The insurance sector in Ethiopia has been shaped by the financial sector liberalisation and market reforms that took place in the early 1990s. These reforms dismantled the state-driven monopoly, opened the market for privately owned insurance companies to enter, and encouraged assistance from international development donors to support the growth of the insurance sector. As of 2021, the insurance market comprises 18 insurance providers, including a reinsurance company, and caters for an estimated 1.2 million insurance policyholders (Stakeholder consultations, 2022)[1].

Insurance sector remaining underdeveloped with limited retail reach. While market liberalisation prompted enhanced competition, this has yet to translate into broader and deeper access to insurance. Ethiopia continues to have one of the smallest insurance markets in SSA in terms of penetration rates, with premiums largely concentrated in general insurance and primarily driven by compulsory lines such as third-party motor vehicle insurance. While life business in Ethiopia holds about 5% of the market share, this figure is relatively miniscule compared to non-life business, thus signalling an underdeveloped voluntary retail market. With historically underserved segments such as farmers and MSMEs still without insurance, a clear need continues to exist for significant and accelerated market development to take place in Ethiopia.

Limited innovation observed beyond donor-led pilots. The low uptake of formal insurance, yet popular use of informal risk-pooling mechanisms such as edirs, suggests latent consumer demand that could be tapped through value-driven market innovation. However, while a few product innovations have been developed, these have not been successful at better serving the excluded. For example: international donors have entered into partnerships with incumbent insurers to pilot agriculture index-based insurance to cover farmer risks, but capacity constraints have undermined long-term sustainability. Furthermore, while insurance players are working to digitalise their service offerings and to partner with alternative distribution partners like MNOs, limited success has been observed to date due to the high level of risk aversion and weak capacity of Ethiopian insurers.

An increasingly enabling environment but with constraints remaining. The big innovation gaps left in the market suggest room for incumbents, new entrants and insurtechs to better serve Ethiopian individuals and businesses to increase insurance uptake. Yet, an assessment of the innovation-enabling ecosystem shows that, while some factors bode well for innovation, key elements continue to constrain market development:

  • Expanding and increasingly competitive payment and ICT sectors, respectively, provide scope for more efficient and alternative distribution channels, such as via mobile money; but poor electricity access and reliability exacerbate weak digital connectedness, thereby hampering the scope for viable insurance distribution through digital channels.

Severe skills shortages prevail in terms of both insurance-specific skills (e.g. actuarial skills) and basic STEM qualifications, despite numerous state initiatives. While the local start-up ecosystem is expanding, a focus on insurtech development remains to be seen.

  • Insurtechs struggle to outcompete paytechs for seed capital, while incumbent players lack financial resources to invest in product development due to conservative boards, weak access to capital and the unavailability of requisite skills.
  • There is a strong demand for informal risk mitigation tools, but low trust, limited awareness and low incomes limit uptake of formal insurance.
  • Alternative distribution channels, such as MNOs, are yet to be explored, while others remain inaccessible due to regulatory barriers such as constraints on bancassurance.
  • The regulatory framework does not yet provide clear guidance regarding digitalised insurance, microinsurance and leveraging alternative distribution channels. More broadly, the remaining restrictions on foreign participation limit the scope for innovation.
  • While the Insurance Supervisory Directorate (ISD) supports market development, its lack of independence from the National Bank of Ethiopia hinders its ability to prioritise innovation, adjust supervisory frameworks for greater flexibility and engage more proactively with market players.

[1]        This figure does not include community health insurance policyholders.

FSD Africa Impact Report – 2022

FSD Africa is a specialist development agency working to make finance work for Africa’s future. Set up in 2012, we work on policy and regulatory reform, capacity strengthening and improving financial infrastructure, and addressing systemic challenges in financial markets to spark large-scale and long-term change.

Additionally, we provide risk capital by investing in cutting-edge ideas that we believe have the potential for significant impact. We take on projects that are more complex and riskier than those taken on by typical development finance firms, to unlock additional funding for innovative sectors.

Over the past decade, we’ve seen that investing in financial markets drives economic growth, boosts the income of vulnerable groups and helps to reduce poverty. Through our market-building initiatives, we have directly and indirectly crowded in around £1.9 billion in long-term capital, availing finance for SMEs, affordable housing and sustainable energy projects.

Our work has also enabled development of innovative products, increasing access to financial services for close to 12 million people in Africa. This improved access has been particularly beneficial during the Covid-19 crisis. Between 2020 and 2021, we saw an 87% increase in the use of remittance services to cushion families from the economic effects of the pandemic.

Our programmes have also supported business growth, increasing access to jobs for vulnerable groups such as women. To date, we have created or sustained approximately 67,200 full-time equivalent (FTE) jobs, of which 12% were green jobs and 59% were occupied by women.

Results against five-year targets

The figure below shows our cumulative results against the five-year targets for each of our core indicators.

Impact over 5 years

Innovative finance is essential to tackle barriers to investment in Africa’s climate finance needs – at an average investment of USD 250 billion annually from 2020 to 2030

Posted on by Kihingu Inc

11 August 2022: The African continent presents a massive investment opportunity for investors to advance the deployment of climate solutions in the coming decade according to a new report Climate Finance Innovation for Africa. However, this will require innovation in financing structures and the strategic deployment of public capital to ‘crowd-in’ private investment at levels not yet seen.

Current levels of climate finance in Africa fall far short of needs. Africa’s USD 2.5 trillion of climate finance needed between 2020 and 2030 requires, on average, USD 250 billion each year. Total annual climate finance flows in Africa for 2020, domestic and international, were only USD 30 billion (CPI forthcoming), about 12% of the amount needed.

Barriers related to shallow financial market depth, governance, project-specific characteristics, and enabling skills and infrastructure have stifled private investment in African climate solutions to date.

To overcome these challenges will require innovation in financing structures. But there is no one-size fits all. Public and private investors must tailor their financial instruments and strategies depending on the acute or chronic nature of the barriers identified.

Recommended actions for increasing the deployment of innovative finance include: Identifying and understand barriers constraining finance by sector and geography, matching instruments with barriers, matching instruments with project and technology lifecycles, enhancing engagement and co-financing with local stakeholders, and supporting innovation by establishing conducive policy and regulatory frameworks.

This work provides a framework for how these instruments and strategies can be efficiently deployed to overcome barriers to finance and capitalise climate solutions in Africa.

Read full report here.