Sustainable Insurance: The dilemma of Small and Medium Enterprises in Africa

In today’s rapidly changing world, sustainability has become a critical component of business strategy across all industries. The financial industry, which plays a critical role in the financing and protection of businesses and their assets is now expected to drive greater sustainability by investing and protecting ventures which are sustainable. This trend therefore presents, the  insurance industry which is an integral core of the financial industry a unique opportunity to drive positive change and sustainability  by incorporating Environmental, Social and Governance (ESG) considerations into its operations. Before I delve into the subject, one may ask; what is sustainability and how can the insurance industry drive  sustainability and expected positive change?

Sustainability in business practice refers to strategies and operational processes that meet the needs of the present without compromising the ability of future generations to meet their own needs. It involves integrating environmental, social, and economic considerations into decision-making processes to create long-term value for both the business and society.

Sustainable insurance involves integrating environmental, social, and governance (ESG) factors into insurance products, policies, processes, solutions and practices. This includes promoting green technologies, supporting climate resilience, ensuring fair, ethical and governance practices. For businesses, especially SMEs, this means not only protecting assets and lives but also contributing to broader sustainability goals.

Sustainable insurance is increasingly recognized as a vital component of responsible business practices worldwide. For Small and Medium Enterprises (SMEs) in Africa, the integration of sustainability into insurance presents both significant opportunities and formidable challenges. This article delves into how African SMEs perceive and engage with sustainable insurance, highlighting the unique factors influencing their adoption of eco-friendly and socially responsible insurance solutions.

Barriers to Sustainable Insurance

Small and Medium Scale Enterprises (SMEs) in Africa are faced with enormous challenges in the field of sustainable insurance.

Limited awareness and understanding:
One of the significant barriers for sustainable insurance among SMEs in Africa is the lack of awareness and understanding of sustainable insurance. Many small business owners are unfamiliar with the concept and how it can benefit their operations. The focus for many SMEs remains on traditional insurance products that address immediate risks rather than long-term sustainability. A medium sized real estate company may not prioritize sustainable practices due to a lack of awareness about how green insurance products could help mitigate environmental impacts and improve operational efficiency.

High costs of sustainable insurance:
Sustainable insurance products often come with higher premiums compared to traditional policies. SME operations are often very sensitive to cost due to their lower volumes and margins. Therefore, these increased costs can be a significant deterrent. The higher upfront cost may outweigh the perceived benefits, pushing SMEs to opt for less sustainable but more affordable options. An SME in the agriculture industry might find the cost of a climate-risk insurance policy prohibitive compared to standard coverage, impacting its ability to invest in sustainable practices. Not just the higher premiums, some of the practices that leads to sustainable business in themselves come at a high cost. For example, the cost of installing and maintaining green houses could be prohibitive to an SME in the agricultural industry just as the cost of installing green energies such as solar is very high to the average SME in the services industry.

Limited availability of sustainable insurance products:
In many African countries, the insurance market is still developing, and there is a limited range of sustainable insurance products available. This scarcity makes it difficult for SMEs to find products that align with their needs and sustainability goals. A tech startup in Ghana might struggle to find insurance policies that cover risks associated with innovative green technologies or sustainable business practices.

Regulatory and policy gaps:
The regulatory environment for sustainable insurance in Africa is often underdeveloped. Without supportive policies and regulations, insurers may be reluctant to offer sustainable products, and SMEs may lack incentives to adopt them. The absence of regulations supporting green insurance products means insurers have little motivation to develop such offerings, leaving SMEs limited or unsuitable options.

In dealing with the barriers to sustainable insurance, raising awareness about the benefits of sustainable insurance is crucial. Insurance providers and related stakeholders can play a significant role in educating SMEs about how sustainable insurance can mitigate risks, enhance resilience, and contribute to long-term financial stability.

Developing affordable and tailored sustainable insurance products for SMEs would help overcome cost barriers. Insurers could design products that cater specifically to the needs of small businesses, providing coverage that is both sustainable and economically viable. Parametric insurance for instance is a growing trend, particularly in regions vulnerable to climate change. It provides payouts based on predefined parameters like weather conditions or natural events, rather than actual losses. A farmer in Kenya could purchase insurance that automatically pays out if rainfall drops below a certain level, protecting against drought. According to the World Bank, parametric insurance can reduce the time it takes to receive a payout by up to 90% compared to traditional claims, making it highly beneficial for SMEs in agriculture, which are exposed to climate-related risks.

Insurance for Renewable Energy Projects: SMEs involved in renewable energy projects, such as solar installations, can benefit from specialized insurance that covers both equipment and operational risks. The African Development Bank estimates that Africa could see over

$7 billion in investments in renewable energy by 2025, and insurers are creating products specifically to cover these growing sectors.

Climate-Related Losses and Insurance Uptake: According to Swiss Re, global losses from natural catastrophes reached $270 billion in 2021, of which only 40% were insured. This insurance gap is even larger in Africa, where climate risk insurance could mitigate significant economic damages. The adoption of climate risk insurance, such as flood or drought coverage, could reduce losses for SMEs by up to 30%, providing a safety net for vulnerable sectors like agriculture

Microinsurance offers affordable and accessible insurance options for low-income individuals and businesses, making it a suitable model for SMEs in Africa. Companies like BIMA and Hollard in Ghana have introduced micro / SMEs insurance products that are tailored to the needs of small businesses. These initiatives provide essential coverage for business risk and could be expanded to include sustainable insurance products, offering lower-cost options that support green practices. Microinsurance programs have reached over 60 million individuals globally, with a significant portion in Africa.

Public-private partnerships can facilitate the development and distribution of sustainable insurance products. Governments and its agencies such as Environmental Protection Agency (EPA), development partners like the IFC, GIZ, GIRSAL, World Bank to mention a few, and the Insurance industry can collaborate to create incentives and frameworks that support sustainable practices among SMEs. The African Development Bank’s Climate Risk Insurance Initiative aims to enhance access to climate risk insurance for SMEs through collaborative efforts between public and private sectors. Advocating for supportive policies and regulations is essential to foster a conducive environment for sustainable insurance. The African Risk Capacity (ARC), an African Union initiative, provides weather-based insurance products to African countries and SMEs to improve disaster preparedness. ARC estimates that every $1 spent on insurance results in $4 of benefits through reduced economic losses and quicker recovery times.

Sustainable insurance products are experiencing rapid growth. A report by the Insurance Europe Federation found that the global market for green insurance products grew by 20% in 2022. In Africa, however, only about 10% of SMEs currently have access to these products. Expanding availability could increase resilience in sectors like energy and agriculture, which are crucial to economic development

Below are some examples of Sustainable Business Practices SME’s can adopt.

• Implementing energy-efficient technologies in operations.
• Offering eco-friendly products or packaging.
• Partnering with suppliers who follow ethical and sustainable practices.
• Committing to reducing carbon footprints through renewable energy and carbon offset initiatives.
• Waste reduction, implementing recycling programs, automate processes and reduce / eliminate paper usage.
• Encourage carpooling, use electronic/ hybrid vehicles.
• Diversity and inclusion, foster a diverse workforce, promote equal opportunities.
• Usage of recycled and biodegradable materials

Incorporating sustainability into business practices not only benefits the environment and society but would also drive innovation, resilience, and profitability.

In conclusion, the journey towards sustainable insurance for SMEs in Africa presents both challenges and opportunities. While the financial vulnerability of SMEs is evident, the need for insurance solutions that align with the unique risks of these businesses is equally urgent. Stakeholders, including governments, insurers, and development organizations, must collaborate to create policies and products that are not only accessible but also adaptable and affordable to the dynamic needs of African SMEs. By integrating sustainability into insurance frameworks, we can support the growth and resilience of this vital economic sector, fostering an environment where businesses thrive amidst uncertainty. The future of sustainable insurance in Africa depends on a collective effort to innovate, invest, and ensure no business is left behind.

 

Writer: Iddrisu Nashiru, MD Hollard Life Assurance, 1^st Vice President of Ghana Insurers Association. A chartered Insurer (CII UK and Ghana) a fellow of the Chartered Institute of Ghana (FCIIG) and a certified ESG professional.

 

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