A Bloomberg's investigative report highlights Africa’s plight caused by climate change and the West’s reluctance to provide necessary support to its governments.
Case Study: Chilimani Village in Malawi
The report cites Chilimani, a small village in Malawi, devastated by floods in 2022, followed by Cyclone Freddy in early 2023, which set records for intensity. This year, the worst drought in decades ruined the corn harvest, the village’s main food.
The drought, driven by the El Niño weather pattern, has pushed 26 million people in southern Africa to the brink of starvation. Corn plants cannot grow without water at critical stages of their growth cycle.
A lifeline for the villagers was an unusual insurance policy funded by their government and supported by major reinsurance companies. Malawi received financial compensation after the drought reached critical levels. However, by November 2023, more than seven months after the declaration of a national disaster, only limited aid had reached Chilimani farmers.
A Continent in Crisis
Malawi’s situation is not unique. The rest of Africa, which has contributed minimally to greenhouse gas emissions causing global warming, has demanded compensation from wealthy nations for decades to mitigate severe economic damage caused by climate disasters—but with little success.
While rich nations have struggled to fulfill long-standing pledges to create climate aid funds, they have pushed for insurance-based solutions to transfer more climate risks from developing countries to international capital markets, reducing donor burdens.
Following COP29 Climate Summit last month, developed economies once again turned to private markets to raise the majority of funds poor nations need to combat global warming.
Political economist Nicholas Bernardes from Warwick University, who has studied insurance programs in Africa, said, “Rich nations don’t want to take responsibility for hundreds of billions of dollars annually.”
Parametric Insurance: A Double-Edged Sword
Insurance, as a risk management tool, is common in the West but is a new concept for millions in Asia, Africa, and the Caribbean, who are increasingly drawn—often unknowingly—into such schemes.
Unlike traditional insurance, where payouts are based on actual damages, parametric insurance works differently. A pre-agreed compensation amount is triggered by specific metrics. For drought, this might be dangerously low rainfall levels leading to crop failure. However, narrowly missing the threshold can result in no compensation at all—even when losses are significant.
John Anderson, Chief Economist at the World Bank, supports the use of parametric tools but emphasizes the need to combine them with measures for long-term resilience against future shocks. “We can’t simply insure ourselves against the effects of climate change,” he noted.
Implementation and Challenges
Since 2007, a parametric insurance program in the Caribbean has paid out $390 million for hurricanes, excessive rainfall, and earthquakes. Similar efforts are advancing in China and India, and Swiss Re AG projects the global parametric insurance market to reach $29 billion by 2031.
Africa’s efforts are among the most ambitious. The African Union aims to cover 700 million people—half the continent’s population—under parametric policies by 2033. So far, its African Risk Capacity (ARC) initiative has covered 135 million Africans since its inception, including 23 million last year.
However, challenges persist. Some countries struggle to afford premiums, while others, like Kenya, have withdrawn due to delays or disputes over data used to trigger payouts. Wealthy African nations like Zimbabwe and Zambia, facing crippling debts, rely on parametric insurance as a lifeline.
Financial Gaps in Combating Climate Change
Africa faces a growing climate crisis, with droughts, cyclones, and floods becoming more frequent and intense. The European Investment Bank estimates that $250 billion—equivalent to 10% of Africa’s GDP—needs to be mobilized annually to combat climate change.
Yet, such financial mobilization remains far from reality. Over the past decade, ARC has disbursed $213 million, a modest contribution to bridging Africa’s significant climate finance gap.
Developmental Roadblocks
The high costs of recovering from extreme weather events undermine Africa’s development efforts. Guy Midgley, acting executive director at Stellenbosch University’s School of Climate Studies in South Africa, explained, “Africa is in a critical position because the costs of recovering from extreme events erode any attempts at development.”
ARC Ltd, launched in 2014 with support from the UK and Germany, has sought to establish sustainable insurance models. However, its success depends on widespread participation by African governments in paying premiums, even though only a few benefit from payouts.
Looking Ahead
While parametric insurance is a promising tool, its effectiveness depends on timely payouts, improved data accuracy, and more equitable structures to ensure meaningful support for Africa’s most vulnerable populations. However, without significant global financial mobilization, Africa remains far from securing the resilience it urgently needs.
