Adoption of sustainable insurance in EAC market

Africa, being one of the most climate vulnerable regions in the world, has a deep-rooted connection between its growth and sustainable insurance. In 2021, the Nairobi Declaration on Sustainable Insurance marked a significant step towards de-risking businesses across the continent. To delve into the progress and challenges of this commitment, Dorothy Meseke, a Nature and Biodiversity Finance expert from FSD Africa, sheds light on the current status of sustainable insurance in East Africa. At the heart of sustainable insurance lies the concept of development that meets present needs without compromising future generations. The East African insurance market has shown progress. However, with an insurance penetration rate nearly half of the global average, there is ample room for expansion and development. Various insurers have taken the lead in promoting sustainable insurance, with the formation of collaborative forums like the African Natural Capital Alliance. This alliance aims to address risks and opportunities arising from climate change and nature, producing innovative nature-based insurance solutions. The accessibility of sustainable insurance depends on companies' understanding of assessment criteria and compliance with nature-based protocols. While there is interaction among insurers and the establishment of specialized underwriting pools like the geothermal underwriting pool in Kenya and Ethiopia, a unified framework for nature-based insurance remains a challenge. Currently, insurers are working on de-risking investments in complex projects, such as geothermal infrastructure, where insurance solutions play a crucial role. For small and medium-sized enterprises (SMEs), which form the backbone of African economies, the impact of climate change poses significant risks. With 90% of businesses reporting adverse effects from global warming, microinsurance products are being developed to cater to vulnerable groups. The African Development Bank estimates that climate change-related costs could lead to a 3% GDP reduction by 2050, with countries allocating significant portions of their budgets to respond to extreme weather events like droughts and floods. To support those without collateral, social protection schemes and government subsidy programs are being introduced. These initiatives aim to provide financial protection to vulnerable communities, ensuring resilience in the face of climate risks. By subsidizing insurance premiums for assets like livestock, governments are enabling low-income earners to safeguard their livelihoods and promote financial stability. As Dorothy Meseke emphasizes, sustainable insurance is not just a financial instrument but a tool for building resilience and ensuring sustainable development. By fostering collaboration, innovation, and inclusivity, the insurance sector in East Africa can pave the way for a more secure and prosperous future for all.