The African Union’s African Risk Capacity (ARC), the continent’s sovereign disaster risk insurer, has announced plans to offer governments insurance against losses as a result of tropical cyclones and floods from next May.
ARC, which through its affiliate insurance mutual African Risk Capacity Insurance Company Ltd (ARC Ltd) already insures participating African nations against drought, also said it expects a further five countries to sign up to the pool this year (3-page / 145 KB PDF).
A total of 20 to 30 African countries are targeted to become members of the scheme over the next four years.
ARC was established in 2012 as a specialised agency of the African Union with a mandate to help member states “improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters”.
ARC Ltd was formed in 2013 and capitalised through 20-year interest-free loans amounting to the equivalent of $95 million from the UK’s Department for International Development and German development agency KfW on behalf of the federal government.
In its first year, the pool said it insured Niger, Senegal, Mauritania and Kenya for $129 million in total losses, reinsuring $55m in the international markets. “With the additional five countries expected to join, the total coverage is set to rise to $192m this year, with over $70m reinsured,” ARC Ltd said.
A “modelled loss index based on satellite rainfall date” is used to insure against drought, ARC said. Member countries must have “pre-approved contingency plans in place which describe how insurance pay-outs will be used should the coverage be triggered.”
ARC Ltd said it had already paid out the equivalent of $26.3m in its first policy year after three of the participating countries in western Africa suffered low rainfall. “A key feature of ARC is its quick pay-out time and it is notable that Senegal, Mauritania and Niger had already received the equivalent of $16.5m, $6.3m and $3.5m respectively by the time the UN had launched a mid-February appeal to fund humanitarian support in the Sahel,” the company said.
According to ARC (4-page / 417 KB PDF), droughts “significantly threaten record gross domestic product (GDP) growth in sub-Saharan Africa”. “A 1-in-10 year drought event could have an estimated adverse impact of 4% on the annual GDP of Malawi, with even larger impacts for 1-in-15 and 1-in-25 year events,” ARC said. “Such decreased productivity detracts from economic growth, causes major budget dislocation, erodes development gains and resilience, and requires additional emergency aid from the international community in the future.”
The chairman of the board of ARC Ltd and the former chief executive officer of the World Bank’s International Finance Corporation Lars Thunell said: “ARC has broken new ground in combining science, political ownership and risk pooling to address catastrophes and food insecurity, and showcases the benefits of African government-led initiatives to build resilience to climate risk.”
Thunell said leaders of the G7 group of major industrialised nations “singled out” ARC at a summit last month “as a model for disaster risk management in developing countries”.
ARC said G7 leaders “pledged to insure up to 400 million more people in developing countries against climate change risk by 2020 and to support the development of early warning systems in these regions”.
“To reach this goal, they pointed to ARC as well as the Caribbean Catastrophe Risk Insurance Facility, an equivalent pool for the Caribbean, as successful existing risk insurance facilities upon which to build and from which to learn,” ARC said.
In “the longer term”, ARC Ltd said it plans to set up a platform to issue “parametric climate change catastrophe bonds”. The company is also looking into insuring African states against outbreaks of infectious disease.
ARC’s founding director-general Richard Wilcox said earlier this year (2-page / 235KB PDF) that cover for outbreaks of disease and epidemics was also being planned in light of the Ebola crisis that ravaged West Africa in 2014.
Wilcox said: “While pricing models will be more complex than in ARC’s existing drought product, and flood and tropical cyclone modelling, product development is feasible and will reflect true risk.”
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