The insurance industry was at the forefront of discussions at the COP26 climate change conference in Glasgow in November 2021. Members of the Net-Zero Insurance Alliance called on the insurance industry to serve as an enabler of the great transition toward a decarbonized economy, one that will likely require a $100 trillion investment.
In a recent call with Ezekiel Macharia, we learn how a leading insurance and reinsurance broker based in Kenya is helping to build climate resilient economies in East Africa.
Historically, Africa’s contribution to greenhouse gas emissions has been negligible and currently comprises less than 2% of the world’s total. Still, the continent has and will continue to be disproportionately affected by climate change.
For Macharia, who is the Chief Actuary and Managing Director of Kenbright, responding to the climate emergency is an opportunity to innovate.
Nevertheless, Macharia shares Kenyan President Uhuru Kenyatta’s concerns expressed at the COP26: “the climate emergency cannot be treated as an individual or developing nation issue. All sectors, countries, governments must act now.”
“As such, insurance is where we can provide real value and lasting impact in addressing climate change,” he says.
Identifying climate related risk
Macharia urges insurers to use their understanding of risk to help organisations mitigate and adapt—and thus protect a greater share of the global economy. “Insurance can help clients to transfer risk that they consider volatile to their business.”
But Macharia points out, “people look at insurance as merely risk transference. If you assess the entire risk management cycle, there is retaining risk and transferring risk. And before all of that, you need to know the risk—you need to identify the climate risk.”
“At Kenbright, we’re focused on assisting businesses in East Africa to identify climate related risks.” Currently, Kenbright’s headquarters is in Kenya while they also operate in Uganda, Tanzania and Rwanda.
For Macharia, who trained as an actuarial scientist at the University of Nairobi, innovation is developing products that cover climate-related risk specifically. “We work with insurers to develop products that directly respond to climate risk. In some cases, this includes developing products from the ground up.”
The brokerage firm’s expertise allows them to respond to the demands of climate change. “Kenbright has the brokerage arm which works with organisations like Parhelion, and the other actuarial arm which does product support and development for the market,” Macharia explains.
Additionally, Kenbright has increased capacity by recently adopting sustainability standards and ESG reporting. This is an important step to better help clients work towards a net zero sustainable future.
A clear and crucial outcome from the COP26 discussions is how net zero is now an organising principle for businesses.
“We’re now a consulting member of the Global Reporting Initiative (GRI). This means we’re a much stronger tool to assist other organisations achieve net zero, while also looking at climate risk and reporting as well as the ESG agenda.”
Macharia elaborates saying, “the GRI is looking at new ways of reporting and plan to release an insurance reporting requirement hopefully by this year. And we want to be part of that conversation so that we can assist players on climate risk at a higher level.”
Unlocking geothermal development
Undoubtedly, renewables lie at the heart of a global energy transformation. With an abundance of solar, wind, and geothermal resources, African countries already have a comparative advantage.
But according to the IEA the world must double the rate of transition to renewable energy to have any chance of achieving net zero carbon by 2050.
This is something Kenbright has been actively working towards by using insurance to unlock geothermal development in East Africa. “We’re looking at geothermal development in terms of risk mitigation and support,” Macharia underlines.
The reasoning behind geothermal over other renewables is, “Kenya is a great natural resource for geothermal, and we believe it’s a good source of power to phase out harmful fossil-fuel based power generation.”
Notably, geothermal is not dependent on weather conditions unlike wind or solar power and has very high-capacity factors.
“We also have a very intimate history with geothermal power. The chairman and founder of Kenbright, Paul Gondi, was the pioneering Chairman of the Board of Directors of the state-controlled Geothermal Development Corporation. (GDC).”
Currently, Kenya is the largest geothermal energy producer in Africa, with its power production contributing to over 40% of the country’s electricity generation. And yet, about 10,000 MW of untapped geothermal energy potential is thought to be buried beneath the 900 km long Kenyan Rift Valley in more than fourteen prospective sites.
While the advantages are evident, there are risks associated with geothermal projects. Macharia points out “the stakes are high for investors and there’s a lot of capital to risk losing.” An issue is the vast majority of capital risk on the front-end, including: exploration risk, drilling risk and power facility construction risk.
This is where partnerships are pivotal.
“In the insurance world, it’s all about managing pools and sharing the risk. And so, collaborations with organisations like Parhelion are crucial to us because they bring different risk appetites to our East African market, which allows us to enhance the value proposition for our product.”
For this reason, Kenbright, Parhelion and FSD Africa have announced plans to launch a first-of-its-kind underwriting facility later this year, to de-risk early-stage development of geothermal energy projects. It will mobilise the domestic insurance and reinsurance sector in East Africa, and have the capacity to significantly expand electricity and energy sector resilience in Kenya and Ethiopia.
“Such partnerships allow us to access new pools, capital and new underwriting rules that enable us to enrich our products,” Macharia highlights.
Finally, for Macharia: “the insurance industry plays a critical role, not just in the recovery from disasters but in shaping preparations for the next one.”
“Insurance is really about preparation. When a climate disaster strikes, which is growing in severity and occurrence, the funds are readily available to take care of it.”
“There’s really nothing magical about it. It’s just preparation.”