Catastrophe modeling and resilience in Africa

Mark Maroon:

Hey, everyone. Welcome to Climate Check. This is Mark Maroon, Vice President and Head of Portfolio Management and Reinsurance at American Modern, a Munich Re company. Today, I'm joined by Walter Voigts-von Forster, Head of Property and Casualty Insurance for Africa at Munich Re. Walter, thank you so much for joining us today.

Walter Voigts-von Forster:

Thank you, Mark, for having me.

Mark Maroon:

So to begin, can you maybe give us a little bit of an overview of your role here?

Walter Voigts-von Forster:

Yes, I can. I am the head of non-life reinsurance at Munich Re of Africa. So, that spans all of property, casualty, specialty insurance, whether it's treaty or facultative, across the African continent, other than the north bordering on the Mediterranean ocean.

Mark Maroon:

Thank you for that. Listeners of this podcast are pretty familiar with the connection between climate change and the increasing frequency and severity of extreme weather events. Would you mind walking us through how this is playing out on the continent of Africa?

Walter Voigts-von Forster:

Yes, thank you. So, what is it that we can observe from the science of what is happening in Africa? We can surely, with high confidence, say that mean temperatures; hot extremes are way above natural variability, and way above where they have been relative to the pre-industrial times. And we can see that this rate of surface temperature increase has been, in Africa, more rapid than it has been elsewhere; and we also know from the science this is clearly human induced. And we can see more heat waves as a result. With the mean moving a bit up, we can see more of the extreme events happening on the hot side, and we can also see less of the extreme events happening on the cold fronts. And that is pretty much projected to continue to go up throughout the 21st century.

We see that on the land, we see it on the marine side, similar on the oceans surrounding the continent. And that leads to, basically, sea levels rising, the risk of coastal flooding rising, the risk of coastal erosion rising. Again, we know that, with full confidence. What does it mean that the continent is getting warmer? It means overall, it will become drier in Africa, and particularly in Southern Africa. There will be less precipitation in the mean, that leads to more increased conditions that are conducive to fire. But on the flip side, it also means the events of very high precipitation will also increase, so we can expect those events with really heavy rainfall, pluvial flooding, those events to increase, even if the mean precipitation is decreasing. And the last item that we can see clearly, that is happening and will continue to happen, is more tropical cyclones, so stronger tropical cyclones, more of them in the four to five strength category.

Mark Maroon:

So have you already started to experience some of these extremes resulting in increased losses?

Walter Voigts-von Forster:

Look, it's always difficult to make a direct link between a particular loss and the overall climate change that we're observing. So, one should not confuse correlation there immediately with causation for an individual event, but we are absolutely seeing an increase in heavy loss events. Leaving aside the insurance losses for now, we track economic losses; we track fatalities around events since 1980, as a company globally, and we look at the African statistics in particular. And in the '80s, in the '90s, the 2000s, we had one or two events per decade that exceeded, on an inflated basis, the $1 billion economic threshold. However, in the last five years, we've seen six of those events happening. One of those events was the earthquake last year that we had in Morocco. Clearly, that's not weather induced, but we've seen three heavy floods. In Nigeria, in Libya, in South Africa, in '22 and '23, we've seen two bad cyclones with Idai and Freddy, that also happened. So, the type of events that science forecasts, that will be happening in the 21st century, more frequently and more intensely, are the events that we're seeing here.

Mark Maroon:

So if you had to estimate, what portion of the losses that we've seen recently would be covered losses compared against economic losses?

Walter Voigts-von Forster:

Yeah, so when I mentioned that we are tracking economic losses and I mentioned those above a billion dollars, the insured portion of that is minuscule. There's one exception, and that was the bad floods that we had in April of '22, and in Durban in South Africa, because that went through a highly industrialized area, and where maybe even a third of that loss was insured. Normally, that is not the case. Normally, it is less than 1%, and even in the area of a 0.1% of economic losses being insured, due to the low penetration of insurance products in these countries.

Mark Maroon:

So it very much feels like there's potentially an opportunity there, to at least begin to close the insurance protection gap, because I imagine that gap already exacerbates some of the impacts of the climate change that you've described.

Walter Voigts-von Forster:

It does, and maybe before we talk about an opportunity, I think it's even more of why is that a real problem? Because what normally happens if there's no insurance industry that provides this type of cover, government is the backstop solution. Government has to step in because you then have a crisis, a health crisis, all of that, the natural catastrophe that needs to be cleaned up. So in most cases, governments have not pre-financed a solution. They typically can't access money then, to quickly go and repair the roads, and rebuild, and do what needs to be done. So they then typically either have the option of diverting resources from elsewhere, from education, from public infrastructure, from wherever they need to divert their resources, which is bad. Or, they need to even appeal elsewhere and, say, now start getting a relief, getting grant, getting aid, and the like. So, the response to a disaster is far more prolonged, and the impact is then far more worse, if you can't quickly do it.

So that's why this insurance protection gap is not just, okay, the insurance industry pays, doesn't pay, but then government pays. No, governments typically don't have the ability to do so. And then the opportunity that you reference really comes in to say, okay, if we are unlikely to get that insurance protection gap solved by traditional insurance coming in and selling insurance to everyone, because that's just not happening, what is there that we can more effectively do? How is it that we can pre-organize the financing that would be required if you do that? And there are plenty of solutions for that. That does not need to be traditional insurance. If it is sort of, say, done via a government scheme, via an NGO scheme, there are catastrophe bonds, there are parametric insurance, natural disaster funds, grant guarantees, contingent credits. There are a whole lot of financial instruments, some of which insurers, reinsurers are able to provide. Others are more to the banks. That can all help close that gap.

Mark Maroon:

So in order to get some of that pre-funding that you mentioned, what kind of tools are available to help with that? Because I'm sitting here trying to think. There's potentially a lot of basis risk involved here, so are there sophisticated catastrophe models that can be used, or how do you begin to quantify some of that risk?

Walter Voigts-von Forster:

You come to the right point there, in that we need to... We, and governments, and everybody who is involved in mitigating these disasters need to firstly really understand where's the gap. What are the scenarios that are exposing? What are the scenarios that you need to prepare for, and which perils are there, and how are those perils then anticipated to impact? What are the likely losses that we could see? And there is definitely the analytical capabilities there. The data is there somewhat, but that's where, as an insurance industry, we are one of the players who can provide help there. But, there are plenty of providers, consultants, data analytics companies, and the like who can help gather the data and build those models so that we can really understand the protection gap, and then suitable plans can be devised. Okay, if that is a protection gap, what would need to be the reaction to that protection gap? How would we organize that reaction, and how would we organize the funding to then come in? What can be subsidized, what can be taken from other countries, and how is it done in the most cost-efficient way?

Mark Maroon:

Definitely sounds like a lot of challenges to solve, so if I were to hand you a magic wand that gave you the ability to fix anything along this process, how would you use it?

Walter Voigts-von Forster:

I guess, all along the process, there are a lot of good ways of doing. As I said, there's a way of modeling it, yeah? There are financial instruments that can be there. There is ways of also making sure that the insurance becomes affordable and available, and that payouts are quick, not the traditional, you need to quantify your exact material loss, but there's ways of getting that quickly done and getting into it. I think the magic wand needs to come in to combine all of these things, because there are these individual capabilities. There is that knowhow of this is how it can all happen, but the magic wand comes in to say, how does this all fit together seamlessly into one plan that can be executed from the beginning to the end in the event that there is such a catastrophe?

Mark Maroon:

I love it and I'm still looking for that magic wand, to be honest, so if I have any luck finding it, I'll be sure to share it with you. Walter, thank you so much for joining us today. We appreciate your time and for coming on to talk with us.

Walter Voigts-von Forster:

I'm happy to do so. Thank you for having me.

Mark Maroon:

Absolutely. And listeners, if you liked this episode, please subscribe to our podcast for easy access to past and future episodes of Climate Check. And as always, for more information, head on over to munichre.com/climatecheck. We'll see you all next time.