The influence of weather on the insurance industry, in Nairobi

Abstract

In Kenya, one industry whose revenue is greatly affected by extreme weather events is the insurance industry. It has been observed that extreme weather also has far reaching effects on other industries (Oludhe et al, 2002; Muthama et al, 2002). This study focused on the following four objectives: - To assess the loss of revenue by owners of property and buildings - To evaluate how much the insurance companies loose in terms of claims, - To model the relationship between rainfall and claims - To produce a rainfall derivative, which can be used to assist end-users insure or hedge against losses due to harsh weather conditions or fluctuations of weather parameters. Research was done on Companies. Monthly insurance claims figures were obtained from Alico, Kenindia Assurance 'and Occidental Insurance companies for the years 1997 - 2000. In addition, annual net claims and premium figures were obtained from The Commissioner of Insurance for the years 1987 to 2001. Monthly rainfall data in mm from 1958 to 2001 was obtained from JKIA, Wilson and Dagoretti meteorological stations. Ten questionnaires were also completed by staff from six insurance companies. General trends of rainfall, claims and premiums were analyzed. Thereafter regression analysis was performed between rainfall and claims of the respective insurance companies. Graphs of claims against rainfall were also plotted to give a more accurate idea of the relationships. The results were tested for best line of fit and a rainfall derivative was created. The information from the questionnaires was analyzed and summarized. Results showed that excessive rainfall resulted in numerous claims worth hundreds of thousands of shillings. The relationship between the rainfall and claims parameters was found to be exponential or polynomial in nature. The relationship between rainfall and premiums, however, was not linear in nature since premiums depended on a number of other factors such as location, type of business, physical state of property etc. It was also found that most insurance companies did not always consider weather when underwriting premiums but that they were aware of the effects of rainfall on the insured. Basically, extreme weather events were considered acts of God, i.e. non-preventable, unpredictable natural occurrences. Most insurance companies had not heard of weather derivatives. This meant that there was room for research into the possibility of introducing them into the insurance industry and testing their effectiveness.