Climate change: COP26 and the impact on insurers in Zimbabwe

Nobert Musa Phiri
Muvingi Mugadza, Harare
phiri@mmmlawfirm.co.zw

The 21st century has been characterised by insecurity and by continually growing risks, especially from the spheres of technology, human conduct and even natural phenomena. Climate change has become a major concern for humankind. The only existing debate is on the extent of its impact on different sectors of the economy, such as energy, forestry or agriculture. Climate change also has a profound effect on the insurance sector - the sector is perhaps prepared for some natural disasters, but it is not ready for climate change, which is a systemic threat.

The traditional insurance function is to compensate for losses. Insurers collect vast sums of money from premiums that must be reserved and conservatively invested so that the promise of insurance, paying claims lawfully owed, is upheld even when those claims come due years and sometimes many decades after the policy was issued. Insurers are also major investors in government bonds, stocks and real estate. This makes the insurance sector a valuable ally in adapting to climate change, but only if it perceives the possibility of profitably insuring the risks. Insurers therefore play a critical role in the global fight against climate change: they pay out claims when customers suffer losses caused by extreme weather; they have considerable capacity to make long-term investments in infrastructure to support climate change adaptation and mitigation; and their risk management expertise can help governments, companies and communities develop resilience.

Zimbabwe is extremely vulnerable to climate change variability. Over the past century temperatures have risen by approximately two degrees Celsius, while annual rainfall has decreased by 20 to 30 per cent, leading to diminished fresh water. Approximately 80 per cent of agricultural production in the country is rain-fed. Rainfall patterns have changed, shifting from early November to late December, coupled with ten droughts in the last 20 years, and numerous cyclones and storms. This has compounded the country’s food insecurity.

Forty-nine per cent of Zimbabwe’s total greenhouse gas emissions come from the energy sector. During his address at the 2021 United Nations Climate Change Conference (COP26), Zimbabwean President Emmerson Mnangagwa pledged that the country will reduce emissions by 40 per cent by 2030 through investment in hydro energy, solar energy and biomass, with at least 26.5 per cent of all energy to come from renewable sources. He also pledged to continue to conserve the diverse wildlife while also appealing for assistance to help fight the aftershocks of the droughts the country is currently dealing with and future funding to obtain COP26 pledges. COP26’s main pledges include reductions in emissions, adaptation to protect communities and natural habitats, and climate finance.

The obvious impacts of climate change on insurance are those linked to the coverage of natural catastrophes. However, there also has to be consideration of the growing importance of damages caused by gradual phenomena, such as the progressive rise in sea levels or the desertification of certain areas. Several types of property insurance are affected (at various degrees depending on local conditions): agricultural insurance (damages to crops, forestry, livestock); insurance of buildings, contents, machinery, equipment and transport; marine insurance; insurance in tourism; and business interruption insurance in all sectors.

Numerous legal problems arise as a result of climate change. These naturally stem from the fact that there are two competing interests in the insurance contract. The insured desires to protect themselves against any future contingencies, while all the insurer wants to do is to protect itself against significant increase in existing risks as a result of climate change, without necessarily withdrawing from normal coverage. Consequently insurance contracts could carry restrictions or exclusions of coverage limited to the additional part of the risks caused by climate change. In order for risks caused by climate change to be included and covered in insurance policies, however, climate change and its effects must be defined in policies.

Another problem is that of causation. This results from the fact that losses are often the result of a combination of causes, climate change being just one of them. For instance, in a region where climate change brings more frequent floods, the population might continue to increase, therefore multiplying the losses. In the same circumstances, the economic value of the assets under risk can also increase. If the policy covers the consequences of climate change, is coverage due when a loss is due to a combination of different factors, climate change being only one of them? Difficult legal problems can arise here, first in bringing evidence of the respective impacts of the alleged multiple causes, then in deciding, under the applicable law, whether a loss occurring under such circumstances would still be covered.

In June of 2017 the insurance regulator of Zimbabwe, the Insurance and Pensions Commission (IPEC), launched a micro-insurance regulatory framework that facilitates provision of insurance to low income earners. The justification for micro-insurance according to the regulator was financial inclusion, given that it extends the range of financial products to low earners. Micro-insurance offers a viable alternative for low income households to manage. It has the same purpose as traditional insurance – to allow consumers, whether they are individuals or a business, to transfer their risks and purchase the security they need to live their lives or run their business. Surprisingly, the regulations that were promulgated by the regulator make no reference to climate change or its importance in the development of micro-insurance as a business model. Any policy which fails to acknowledge and appreciate the impact of climate change is fundamentally flawed. According to Richard Ward, ‘Micro-insurance needs to be offered in conjunction with the United Nations Framework Convention on Climate Change to promote development in sustainable areas, rather than vulnerable places that may have to be abandoned in future due to the effects of climate change’.

In failing to appreciate the status of climate change, the Regulator has failed to come up with reasonable measures to mitigate the impact of climate change on micro-insurance. While making reference to index-based insurance in section 2.8 of the preamble of the regulations, IPEC seems not to have focused sufficiently on the importance of climate change. Rather worrying is the fact that in its framework there is no appreciation of the fact that Zimbabwe is a largely agriculture-based economy and has a significant rural population, which is uninsured and has suffered the effects of climate change. The rural population is mostly made up of dryland farmers who are at the mercy of climate change.

The role of insurance is enormous especially when we consider that loss and damage, as well as the provision of remedies is necessary in the face of climate change. Zimbabwe must undertake a range of regulatory initiatives towards a climate resilient economy, without compromising social and economic capabilities of its citizens. As such, there is an urgent need to develop a comprehensive, systematic and (increasingly) multi- and trans-disciplinary understanding of the legal and extra-legal issues on climate change: the facts, science, law and policy. Insurance can play a vital role in alleviating the risks of climate change. IPEC must develop a structured and comprehensive climate change based framework to encourage development of products that are aimed at reducing the impact of climate change. The regulatory challenge that will always arise is to balance these concerns with equally important questions of insurance access and affordability. There is also need for proper collaboration between the policymaker and the private sector on climate change awareness to encourage innovative products that mitigate the effects of climate change.