Thursday 22 May 2014

AU Opts for insurance to stop reliance on external aid

African Risk Capacity (ARC), a specialised agency set-up by the African Union (AU), has launched the first catastrophe insurance pool for African nations as part of efforts to reduce African governments' reliance on external emergency aid in the event of natural disasters.

The catastrophe insurance pool was established to enable parametric insurance policies to be sold to African countries, providing them with post-disaster event financing which is predictable and has a rapid payout mechanism due to the parametric nature of the policies.

"The creation of the first ever African catastrophe insurance pool is a transformative moment in our efforts to take ownership and use aid more effectively. It is an unprecedented way of organising ourselves with our partners, with Africa taking the lead - taking our collective destiny into our own hands, rather than relying on the international community for bailouts," says Chair of the ARC Agency Board and Nigeria's Minister of Finance, Dr. Ngozi Okonjo-Iweala.

The agency has created a specialist hybrid mutual insurance company, ARC Insurance Company Limited (ARC Ltd), which is initially domiciled in Bermuda. ARC Insurance will issue parametric disaster insurance policies to a group of African governments, starting with Kenya, Mauritania, Mozambique, Niger and Senegal. The initial capital behind the insurer has been provided by Germany and the United Kingdom, who are also founding members of the mutual.

To begin with, ARC has issued parametric insurance policies with a value of approximately $135 million. The policies will cover drought and each has been tailored to meet the needs of the covered African country. In addition to its own capital, ARC Ltd has secured reinsurance capacity totaling $55 million the international reinsurance and weather risk markets in order to cover the parametric risks it is taking on from the participating countries.

By pooling the risks from the group of African countries, it enables the reinsurance protection to be secured at a cheaper cost, making the whole project feasible. By pooling risk across countries within a region, the reinsurance market will typically give a better price than reinsuring the countries individually.

At the moment international assistance is secured through an appeals system and then allocated on a largely ad hoc basis after a disaster strikes. As a result, African governments affected by disasters can be forced to reallocate funds from essential development projects to crisis responses, which can create funding problems in other areas of their economies and negatively affect Gross Domestic Product (GDP).




Source Daily Independent

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