Governments and insurance markets combine in scheme to help African nations cope with climate change, By James Brewer
A new catastrophe insurance pool, the first in Africa, has been launched to help countries become more resilient to extreme weather disasters and protect their populations from food shortages.
The African Risk Capacity (ARC) agency of the African Union has created a specialist hybrid mutual insurance company, ARC Insurance Co Ltd, initially domiciled in Bermuda, to issue policies to a group of African governments. First members of the scheme are Kenya, Mauritania, Mozambique, Niger and Senegal.
Germany and the UK contributed the initial capital of $200m, and are founding members of the mutual. ARC Ltd’s incorporation and start up has been supported by partners including law firm Stroock & Stroock & Lavan, Appleby Bermuda (part of a group which is “the world’s largest provider of offshore legal, fiduciary and administration services”), Marsh IAS as insurance manager in Bermuda, and Willis Group as reinsurance broker.
The launch of the risk pool reflects grave concerns about the impact of climate change.
Dr Simon Young, supervisor of the Caribbean Catastrophe Risk Insurance Facility, the first multinational catastrophe risk pool, on which features of the African scheme are modelled, said that risk management tools from the reinsurance and insurance industries could help develop cost-effective sovereign risk mechanisms and adaptation to climate change.
The aim of the African pool is to reduce the reliance of governments on emergency aid from overseas, and the need to reallocate funds to crisis responses from essential development projects, exacerbating problems throughout their economies.
ARC will use 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. The agency’s cost-benefit analysis estimates that each dollar spent on early intervention could reduce ultimate economic impact by as much as $4.50.
The new insurance policies are parametric – index-based. They will provide a total of $135m in drought insurance coverage tailored to the specific requirements of the insured countries. In addition to its own capital, ARC Ltd has secured $55m of capacity from the international reinsurance and weather risk markets to cover the risks.
Nigerian minister of finance Dr Ngozi Okonjo-Iweala, who chairs the ARC agency board, said that the creation of the insurance pool was “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.”
Kenya’s Cabinet Secretary for the National Treasury, Henry Rotich, said: “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.”
Dr Lars Thunell , chairman of the ARC Ltd and former head of the International Finance Corporation said that the insurance programme went further than previous sovereign risk pools because of 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.”