The first ever African catastrophe insurance pool has been launched by the African Risk Capacity (ARC), a specialised agency set-up by the African Union to help member states become more resilient to extreme weather events and to protect food insecure populations, in light of climate change.
The ARC Agency has created a specialist hybrid mutual insurance company, ARC Insurance Company Limited (ARC Ltd), initially domiciled in Bermuda, to issue policies to a group of African governments, initially comprising Kenya, Mauritania, Mozambique, Niger and Senegal. Germany and the United Kingdom contributed the initial capital and are also founding members of the mutual.
“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,” said Dr Ngozi Okonjo-Iweala, Chair of the ARC Agency Board and Nigeria’s Minister of Finance.
The aim of the ARC catastrophe insurance pool is to reduce African governments’ reliance on external emergency aid. Currently international assistance is secured through an appeals system and then allocated on a largely ad hoc basis once a disaster strikes. Consequently, African governments affected by disasters can be forced to reallocate funds from essential development projects to crisis responses, exacerbating problems in other areas of their economies.
Kenya’s Cabinet Secretary for the National Treasury, Henry Rotich, affirmed, “Droughts undermine our hard-won development gains, just as Africa is beginning to realise its vast potential. ARC will help us build resilience among vulnerable populations, protect our agriculture investments, thereby increasing productivity, as well as promoting fiscal stability by preventing budget dislocation in a crisis.”
“I’m proud to have overseen the establishment of ARC Ltd, and am pleased to acknowledge the financial support of US $200 million by the UK and German governments through DFID and KfW respectively,” notes Chairman of the Company Board of Directors and former head of the International Finance Corporation, Dr. Lars Thunell. “ARC Ltd’s insurance programme goes a step further than previous sovereign risk pools thanks to its close ties with ARC Agency. Through the development of contingency plans linked to rapid payouts under the parametric insurance policy, the benefits of ex ante sovereign risk financing will flow directly to the most affected food insecure populations.”
The parametric insurance policies issued this month by ARC Ltd will provide a total of ~US $135 million in drought insurance coverage tailored to the specific requirements of the insured countries. In addition to its own capital, ARC Ltd has secured US $55 million of capacity from the international reinsurance and weather risk markets in order to cover the risks it is taking on from the participating countries.
ARC Ltd utilises a new software application called Africa RiskView developed by the UN World Food Programme to estimate crop losses and drought response costs before a season begins and as it progresses, triggering insurance payouts at or before harvest time if the rains have been poor. ARC’s cost-benefit analysis estimates that spending one dollar on early intervention through ARC could reduce ultimate economic impact by as much as four and a half dollars.
The launch of the risk pool is timely given recent global warnings about the adverse consequences of a changing climate, as Dr Richard Wilcox, Director General of the ARC Agency noted, “ARC is a critical instrument for countries to manage their risks as they experience the consequences of climate change.”
“ARC is a breakthrough in disaster risk management in Africa, a win-win for governments and their partners alike. By putting their political legitimacy and technical skills together, the African Union and WFP have created a game-changer,” commented Nobel Laureate Professor Robert Shiller.
ARC Ltd’s incorporation and start up has been supported by a number of partners, including Stroock Stroock & Lavan, Appleby Bermuda, Marsh IAS as Insurance Manager in Bermuda, and Willis Group as reinsurance broker.