African Risk Capacity: insurance against disaster

African Risk Capacity (ARC) works with countries to improve their preparedness for extreme weather events and natural disasters, and at this year’s G7 summit, leaders endorsed ARC as a model for climate insurance. Ekhosuehi Iyahen, Lead Client Services Manager for Risk Transfer, discusses how the organisation is helping to build a more disaster-resilient Africa
How would you describe the core vision and objective of ARC?
Currently, the main mechanism to respond to natural disasters relies on ad hoc funding, which is secured only after a disaster strikes. While the international community is working to raise funds to respond, the people who are affected by the crises are forced to make difficult decisions in order to cope, such as selling off livestock, removing their children from school and other negative coping mechanisms. Livelihoods are lost, assets are depleted, and development gains suffer major setbacks – forcing more people into chronic destitution and food insecurity in the world’s least developed countries.
ARC was established as a specialised agency of the African Union to help member states improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters, therefore protecting the food security of vulnerable populations.
The objective is to assist member states to reduce the risk of loss and damage caused by extreme weather events and natural disasters affecting Africa’s populations by providing targeted responses to disasters in a more timely, cost-effective, objective and transparent manner.
How is ARC structured?
ARC is comprised of two entities, the ARC Agency, a treaty-based international organisation and specialised agency of the African Union, which provides technical and capacity building services to its member states, and the ARC Insurance Company Limited, which is its financial affiliate established to provide insurance to participating sovereigns. ARC Ltd is a mutual insurance company owned by its members. While it is not motivated by profit, the company operates according to solvency standards. Net gains are reinvested back into the pool to grow the reserves for future years.
What role has the private sector played in the formation of ARC?
As an example, ARC Ltd retained Willis Group for reinsurance brokerage services following a competitive tender process. Willis placed a reinsurance portfolio ($55 million in excess of a $15 million retention) for the company. The reinsurance programme met with strong interest in the markets, with 11 major global reinsurance markets and Africa reparticipating in the company reinsurance programme.
In September 2014, the Willis Group won the Reinsurance Transaction of the Year award at the Insurance Insider Honours for its work in designing and placing the reinsurance for ARC. The Insurance Insider Honours recognise outstanding achievements in broking, underwriting and claims.
Potential members must complete contingency planning to participate. What does this involve?
The process requires countries to identify the optimal use of funds from an ARC payout given the existing national risk-management structures and the needs of potential beneficiaries. Operations plans must be government-driven and based on in-country priorities for risk management in the context of food security. Contingency planning refers to both the operations plan and a final implementation plan that would be submitted by the national government shortly before an imminent payout, and would include detailed information on how the ARC payout would be deployed given the specific situation. These plans are developed collaboratively between national governments, in-country partners and, where needed, the ARC secretariat.
Based on a comprehensive study into the cost-saving benefits of early response, the ARC has developed contingency planning standards and guidelines that help countries to link early warning to livelihood-saving early response activities.
Member states must show that activities meet three sets of criteria:
  • Time sensitive and/or catalytic – ARC Insurance Company Ltd payouts must be used for time-sensitive activities that would not be possible without ‘first available funds’, ideally implemented within 120 days of an ARC payout, and/or activities that prompt or enable other activities to ensure faster and more effective action for the overall response.
  • Livelihood savings – ARC Insurance Company Ltd payouts should not be used for general investment activities, but instead should aim to protect livelihoods of beneficiaries who would be more negatively impacted ifthey need to wait to receive assistance.
  • Duration – Each activity that will be funded by an ARC Insurance Company Ltd payout should be completed within six months to ensure that financial resources are utilised in a timely and efficient manner. This will make sure that countries capitalise on the ‘first available funds’ principle of ARC.
What are the main risks to agricultural industries?
Africa is widely recognised to be the region most vulnerable to weather risks. Weather-related disasters are already undermining record growth across the continent, threatening hard-won development gains and vulnerable populations. Increasing climate volatility will counteract investments being made by countries to mitigate, prepare for and manage current weather risks. The World Bank estimates an adaptation investment cost of $14-17 billion per year over the period 2010-50 for sub-Saharan countries is needed to adapt to an approximately 2°C warmer climate forecast for 2050. Climate change is particularly threatening to the future of African agriculture, which impacts global food security and the economic livelihoods of hundreds of millions of Africans.
What methods and technologies does the ARC utilise to map risk and impact across Africa?
The technical engine of ARC is a software product called Africa RiskView, which uses rainfall data to estimate the number of people affected by a drought event during a rainfall season and then the dollar amount necessary to respond to the affected people in a timely manner. Through the agency’s capacity-building programme, countries are able to model their historical drought response costs and select rainfall-based triggers to determine when they would receive a payout in the future, if they take out an insurance policy. We are working to add flood risk and cyclone risk to the model.
How does the organisation assist member states in boosting preparedness for extreme weather events and natural disasters?
ARC helps its member states to manage risk, instead of the traditional way of managing disasters only after they strike. Member states receive risk-transfer training and other capacity-building services to ensure that operations plans are ready and approved by a technical working group and a peer review committee, prior to a disaster striking. This way, countries are ready and prepared for a disaster before it strikes, ensuring that early intervention activities can be rolled out right away.
ARC made its first payout of $25 million in drought insurance claims earlier this year. What plans do you have to launch other types of cover and products in the future?
In addition to drought insurance, ARC is expanding to offer both flood and tropical cyclone insurance, which will be made available to member states in 2016.
Last year saw ARC launch its Extreme Climate Facility (XCF). How would you describe the structure and purpose of the facility?
The Extreme Climate Facility (XCF), which is currently in the research and development phase, is designed to help ARC member states adapt to an increasingly volatile climate. The XCF will be a data-driven, multi-year vehicle that will provide financial support to eligible African countries to help them build climate resilience and be financially prepared to undertake greater adaptation measures, should extreme weather event frequency and intensity increase in their region. The XCF will be an African-led initiative that is designed to access private capital, diversifying the sources and increasing the amount of international funding available for climate adaptation in Africa.
ARC provides an ideal platform from which to develop and operationalise such a new facility. The XCF will use both public and private funds and facilitate direct access to climate adaptation finance for eligible African governments based on the demonstrated need for enhanced adaptation measures. Its financial obligations to African countries will be securitised and issued as a series of climate change catastrophe bonds. Once established, the bonds will provide additional climate change adaptation financing to participating AU countries, in the event that weather shocks, such as extreme heat, droughts, floods or cyclones increase in occurrence and intensity. The bonds will be financed by capital provided through private investors, with donors supporting the annual bond coupon payments. XCF will be structured so as to issue more than $1 billion in African climate change bonds over the next 30 years.
In February, it was announced that ARC is developing insurance for disease outbreaks and epidemics. How is this initiative progressing?
The outbreak and epidemic (O&E) insurance product is currently also in the research and development phase, with a goal of insuring its first member states in 2017. While the basics of O&E are similar to ARC’s drought insurance, ARC will need to build a new parametric model for O&E to underpin the insurance contracts and work with countries to define the appropriate contingency plans for responding and hopefully containing an epidemic. The most challenging part will be building the underlying parametric model – this has never been done in Africa at the national level before.
How do you see the activities of ARC developing over the next five years?
One main focus will be on portfolio growth and adding new weather risks to ARC’s coverage options. In May 2014, ARC Ltd issued drought insurance policies totalling $129 million for a total premium cost of $17 million to a first group of African governments for five rainfall seasons – Kenya, Mauritania, Niger and Senegal – marking the launch of the inaugural ARC pool. Seven additional countries are in the queue to join the next pool in 2015, with a target of up to 20 countries receiving coverage for drought, flood and cyclones totalling more than $600 million in the next five years.
However, in step with portfolio growth, ARC’s core focus will be on improving the national-level contingency planning and learning from each insurance pool and the implementation of payouts when they occur. At the end of the day, while timely funds are critical, ARC’s insurance instrument will only be as valuable as a county’s ability to convert an early payout into a rapid and effective response to those affected. For ARC to deliver on its promise to strengthen national capacities to manage and reduce risk defining the best practices for more effective and coordinated early interventions will be key and critical to building a more disaster-resilient Africa.