Trillions at risk: Why Kenya must rethink flood insurance

 Dr Hillary Wachinga. [File Courtesy]

Many nations are grappling with emerging climate risks whose economic costs are cumulatively running into the trillions of dollars.

These are financial, social and environmental losses arising from extreme climate-related loss events such as earthquakes, floods and wildfires.

For the insurance industry, climate risks are undermining existing traditional risk management frameworks that were designed for risks that are predictable with a degree of certainty.

Material gaps in NatCat risk analytics and modelling are also distorting pricing and reserving of these risks, leading to insufficient protection. In 2025, according to the Swiss Re Institute, NatCat insured losses were approximately $145 billion (Sh18.85 trillion).

This amount is actually higher than the combined gross domestic product (GDP) of Kenya and Togo. Over 57 per cent of these exposures remain uninsured for various reasons. Approximately 10 of the NatCat claims were directly attributed to flood losses, with 50 per cent of these losses incurred in the US market alone.

Closer to home in Kenya, there has been an increased frequency and severity of flood claims in the recent past, with these losses oscillating between Sh10 billion and Sh30 billion annually in terms of both insured and uninsured flood losses. In 2025, the reported insured flood claims stood at approximately Sh5 billion. It is estimated that flood risk erodes approximately 5.5 per cent of Kenyan GDP every seven years.

The likelihood and impact of NatCat risks are expected to continue rising due to climate change, rapid urbanisation, an increase in the value of assets exposed to these risks, deforestation and human settlement in flood-prone zones, as well as inadequate mitigation strategies.

There is also limited knowledge on NatCat insurance protection, and low uptake of

available insurance protection due to limited availability and affordability. However, there is a notable effort towards mitigating these risks.

This has been mainly through index -based flood insurance covers that rely on recent technologies such as AI and data analytics to analyse data sets on rain patterns collected via satellite images, weather forecasts, automated monitors on rivers, et cetera.

Such a solution is being offered by Britam and Swiss Re to protect vulnerable communities in Tana River County. Challenges remain in flood risk modelling to ascertain the right and adequate risk premium and reserves due to data limitations. Most insurers may not thus have the appetite to expose their balance sheets to this risk and may encounter challenges in obtaining the relevant reinsurance covers.

These factors widen the protection gap emanating from flood risk and may call for the involvement of more actors to cushion the economy accordingly. For the government, inadequate mitigation of flood risk may impair public goodwill arising from mass-

poverty. It may also slow down economic growth and divert key resources for risk reduction efforts, plus public compensation.

Sustainable mitigation of flood risk should be a priority for the Kenyan economy.

Kenya Reinsurance Corporation (Kenya Re) proposes the establishment of a national flood risk insurance pool. This is on a Public -Private Partnership arrangement involving Kenya Re as the residual reinsurer and pool administrator, the insurance industry, the Government of Kenya as well as capital market players, especially those interested in managing Environmental, Social, and Governance (ESG) risks.

Kenya Re proposes to be the pool’s residual reinsurer and scheme administrator. A

ll licensed insurers writing property risks in Kenya will then participate, ceding their flood risk exposure to the pool in exchange for standardised, affordable reinsurance cover.

The State could provide a sovereign backstop for extreme tail -risk events and offer a conducive legislative and regulatory framework. ESG -aligned investors, development finance institutions and multilateral partners can also supply capital, technical assistance and climate data.

Market share

Risk premiums can be set below full risk-reflective levels to ensure affordability, with the gap funded by an industry -wide levy on all property insurers, proportional to the market share.

Risk can be layered: a first-loss retention funded by premiums and reserves; a market layer shared among cedants and Kenya Re; a catastrophe layer transferred to international reinsurance and or capital markets, and a government backstop for events that exceed the programme’s capacity.

The idea is not to replace the market, but to create a mechanism that allows it to function where it currently cannot. Flood risk in Kenya is too concentrated and too volatile for individual insurers to price and fully retain. A pooled structure spreads the risk, brings down the cost and makes cover accessible, which will drive uptake.

Setting up a national flood risk pool for Kenya can mirror similar efforts by the British and Turkish governments, who set up Flood Re in 2016 and Turkish Catastrophe Insurance Pool (TCIP) in 1999. Under the Flood Re arrangement, insurers take 98 per cent of low to medium risks and cede two per cent high-risk flood policies to the pool (in this case, the reinsurer).

The pool initially focused on covering high -risk properties, but that was later expanded to include small businesses. Flood Re operates as a mutual reinsurer that allows insurers to cede high -risk flood policies at subsidised premiums, funded by a £135 million (Sh23.4 billion) annual industry levy. Since its inception, over 560,000 households have benefited from the scheme.

Four out of five policyholders with previous flood claims have seen their premiums fall by more than half. The scheme holds £900 million (Sh156 billion) in invested assets and maintains a 238 per cent operational capital ratio even after absorbing its most significant flood losses in 2023 /24, £241.6 million in gross claims in a single year, with no impact on operational capacity.

The pool was designed not as a permanent subsidy but as a time-limited intervention, with a planned exit from the market in 2039. This creates accountability and urgency.

On the other hand, TCIP is a mandatory insurance cover for all registered residential properties that arose as a collaboration between the private insurance sector and the Turkish Government.

All the insurance business of distribution and claims payment is handled by cedants, whereas the Turkish Government pays compensation for major earthquake losses exceeding the capability of TCIP. This nation, over time, has a fund capable of handling rapid payouts in the event of an earthquake.

Kenya lacks granular flood risk data that underpins sophisticated catastrophe stochastic models in more developed markets. There is also a reduction in claims settlements due to low eligibility of reported losses against pre-set parametric triggers rather than assessed losses.

Kenya is not a signatory to Africa Risk Capacity’s flood pool, exposing the economy to greater flood risk. There is a need for a robust governance framework to support the implementation of the PPP reinsurance pool.

This calls for an independent board with industry and government representation, a dedicated risk and capital committee and a transition sub-committee focused on long -term sustainability. Regulatory oversight by the Insurance Regulatory Authority will also be essential.

If participation is voluntary, adverse selection will undermine the pool’s viability. If mandatory, the legal and regulatory framework must be robust. Kenya Re’s existing mandatory cession arrangements provide a natural mechanism, but legislative backing may be required to formalise the structure.

The question remains whether the Kenyan insurance industry, government and the broader ESG community can assemble the political will, technical expertise, and collaborative discipline to build a climate resilience mechanism that protects millions of Kenyans who are at a growing risk every rainy season.

The blueprints exist as implemented in Britain and Turkey. Flood Re has demonstrated that a well -designed pool can make flood insurance available and affordable, absorb catastrophic losses without systemic disruption and drive measurable improvements in physical resilience.

Turkey has shown that compulsory participation can achieve penetration at scale.

What Kenya needs now is execution: A working group with a mandate, a timeline and the backing of every stakeholder who stands to benefit, which, given the trajectory of this climate risk, is all of us.

This pool is not just about insurance; it’s about safeguarding Kenya’s economic future. It’s about lives, livelihoods and national stability.

It is good to note Kenya Re is already participating in the COMESA pool and is in the process of setting a reinsurance pool that will be launched in 2 nd quarter of 2026.

The industry has learned from prior efforts in running pools and will work closely to ensure the success of the planned and proposed (re)insurance pools.