South Africa’s central bank plans to expand its examination of climate risk to the insurance industry, as it seeks to anticipate threats that can do far-reaching economic harm.

“This year we put out our first climate-risk scenario, common stress test, where we allow all of the banks to tell us how would they respond to a finance stress,” said South African Reserve Bank Deputy Governor Fundi Tshazibana. “We are going to progress that to go to the insurance sector,” she told an event in Stellenbosch, South Africa, on Friday.

The SARB said the report will be released alongside its Financial Stability Review on June 19.

As the planet heats up and weather whiplash spreads, compound weather events — such as heavy rainfall and drought that preceded the deadly wildfires in Southern California earlier this year — are raising risks across the world.

In February, fire engulfed large parts of Cape Town’s landmark Table Mountain, an hour’s drive from where Tshazibana spoke. In addition to drought, South Africa has been inundated with deadly floods in recent years.

Measuring how much of a bank’s loan book has credit-risk exposure to borrowers with climate-related risks reveals numbers of up to 60%, she said.

Damage from climate events can be direct, causing material losses for insurers, but can also weigh on the economy by affecting nature tourism, or by pressuring inflation via food prices, if farming is badly disrupted.

She said the cost of floods in 2022 reached 54 billion rand ($3 billion), while severe droughts have lifted South African food prices by as much as 10 percentage points, which in turn has elevated overall inflation by 3 percentage points.

“What is different about climate-related risks is they are multi-faceted,” she said. “It’s coming from all directions.”

Photograph: South African Reserve Bank Deputy Governor Fundi Tshazibana; photo credit: Waldo Swiegers/Bloomberg

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