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By Emma Rumney
JOHANNESBURG (Reuters) - The world's biggest insurers are expanding in Africa, looking to tap growth promised by a rising population and middle class, but climate change could complicate their quest for profits.
With Western markets overcrowded, the continent provides a rare chance to grow.
In the United States, insurance premiums, including life, and general insurance, make up the equivalent of 12% of economic output or gross domestic product, according to Swiss Re. That is roughly four times the level across Africa, based on African Insurance Organisation estimates for 2019.
However, the region faces some of the fastest warming globally.
Temperatures in southern Africa rose at twice the global rate on average in the five years leading up to 2019, according to a report by the Intergovernmental Panel on Climate Change.
Yet insurers are undeterred, with some looking to expand even in vulnerable territories.
Global reinsurer Swiss Re wants to push further into Nigeria, including the major city Lagos, where sea surges already threaten expensive real estate and poor slums. It is in talks with regulators there to change the rules to allow foreign reinsurance firms to write more business.
Peer Scor wants to build up in agriculture - a sector highly vulnerable to extreme weather.
Other major African banks and insurers including Standard Bank, Absa and Sanlam have also put expanding into African markets at the core of their strategies.
This will expose their portfolios to ever more climate risk. The companies said there were multiple ways to mitigate this, including working with clients to reduce the risks they face.
PEELING AN ONION
Low levels of banking and insurance uptake among the continent's young, rapidly growing and increasingly wealthy population mean Africa is seen as among the most attractive, untapped financial services markets in the world.
Before COVID-19, Africa's insurance market was expected to grow at compound annual growth rates of 7% per year between 2020 and 2025 - nearly twice as fast as predictions for North America, three times that of Europe and better than Asia's predicted 7%, according to McKinsey.
Insurers are already counting the cost of climate change elsewhere. In wildfire hot spots such as California, they have pulled out of providing cover.
But in Africa, the current low levels of penetration mean that massive economic losses from weather-related disasters do not yet reflect in credit and insurance portfolios.
Graphic: Economic vs insured losses in African disasters - https://graphics.reuters.com/CLIMATE-CHANGE/AFRICA-FINANCE/zjpqkmqbmpx/chart.png