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Disaster insurance against climate change attracts African countries

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Disaster insurance against climate change attracts African countries

Innovative risk-pooling initiative will give a lifeline to countries in distress
From Africa Renewal: 
A flooded road. Photo: AMO/B. Karlie
A flooded road. Photo: AMO/B. Karlie
A flooded road. Photo: AMO/B. Karlie

When disaster strikes in Africa, humanitarian aid can take months to reach people on the ground. By then a lot of damage may have been done. During a drought, for example, small-scale farmers facing a sequence of harsh dry seasons may sell their cattle and pull their children out of school. A quicker response could minimize the long-term effects of such a crisis.

To address the problem of slow response to disasters, international development practitioners are advocating for “resilience building,” a term that refers to efforts to help communities brace for extreme events before they happen.

The goal is “to move away from disaster response and shift the conversation to one that is more proactive,” says Dolika Banda, a Zambian economist who was recently named chief executive officer of African Risk Capacity, Limited (ARC Ltd).

“The continent needs to move from an ex post humanitarian response to ex ante preparation and disaster management plans,” says Ms. Banda.

ARC Ltd is the private-sector arm of the ARC Agency, established as a specialized agency of the African Union (AU) to help Member States improve their capacities to plan for and respond to extreme weather events and natural disasters, therefore protecting the food security of their vulnerable populations, according to their website. It was launched by a 2012 treaty with 32 signatories and joins a small but growing group of “risk pooling” initiatives around the world (others are the Caribbean Catastrophe Risk Insurance Facility and the Pacific Risk Pool).

ARC’s plan works like orthodox insurance; think of homeowners who must install smoke detectors to get fire coverage. If the detectors prove insufficient and everything goes up in flames, a system is in place for prompt payouts.

“As a technician, my message is that we cannot depend on nature,” said Hastings Ngoma, the government coordinator for ARC Malawi. “We need risk management.”

ARC promotes the value of insurance coverage to national leaders, advising countries to develop contingency plans before they purchase coverage. This encourages preparedness and makes sure countries know what to expect as they pay for the premiums.

ARC uses a straightforward, novel system called parametric insurance to determine payouts. Under the parametric insurance policies, payouts are made when a predetermined threshold is reached—for instance, if rainfall falls below a certain level.

Customized policies

“You need to reach the trigger,” says Ms. Banda. ARC and countries have to jointly develop customized policies that assure a payout when one is needed, she added.

The organization’s original capital infusion was a loan. Opening shop in 2014 with drought coverage, ARC marked its inaugural period with $26 million in payouts to Mauritania, Niger and Senegal. More recently, Malawi has qualified for $8 million in cash.

The ARC brain trust has calculated that a dollar in premiums translates into at least five dollars’ worth of traditional response—with quicker delivery. ARC aims to cut down its current payout response time of six weeks, but even six weeks outpaces the United Nations’ response in providing relief supplies for the Sahel.

Eight countries, including Kenya, Malawi and Zimbabwe, have taken drought insurance in ARC’s first three years in operation. Total coverage in the second year for seven nations was $178 million. Six countries (Burkina Faso, the Gambia, Mali, Mauritania, Niger, and Senegal) are currently on board for the annual period that runs through mid-2017.

ARC emerged partly in response to concerns about the often delayed and high cost of response of the UN’s World Food Programme (WFP) and donor countries when providing humanitarian relief. The German development bank KfW and a UK aid agency, the Department for International Development, laid down a $200 million interest-free, 20-year loan as seed capital.

Donor and WFP support for ARC is expected to continue. During the COP21 climate summit in December 2015, ARC announced more than $150 million in new pledges from countries including Canada, France, Germany, United Kingdom and the United States.

Last year the WFP announced collaboration with ARC to extend disaster insurance coverage to more African countries, partly thanks to European donors. The WFP’s replica insurance programme will match outlays for countries that consistently invest in insurance premiums via ARC. The UN agency hopes that by 2030 insurance will finance half its natural disaster aid expenditures in Africa and Asia.

“WFP is transforming the way we assist vulnerable communities to cope with natural disasters, from disaster response to risk management,” said WFP executive director Ertharin Cousin during the World Humanitarian Summit in Istanbul last year. “Countries themselves need to own and manage their disaster risk, first and foremost.”

To make sure that it can make good on any and all claims, ARC has its own insurance, spreading its risk among many of the world`s top reinsurance companies, including such big names as Munich Re.

Reinsurance companies

The number of reinsurers that back ARC’s portfolio stands at 24, twice the number that signed on at the beginning in 2014. “They needed us more than we needed them,” says Simon Young, former head of ARC, Ms. Banda’s predecessor. Mr. Young remains in an advisory capacity.

Big insurers have been trying to tap the African market for years, without much success. “ARC is a really nice vehicle for them to get a lot of risk in a nicely packaged way,” says Mr. Young.

Using this leverage, ARC Ltd. can negotiate favorable prices, Mr. Young noted. The appetite among reinsurers is sufficient to cover ARC Ltd.’s needs “many times over,” observes an insurance industry insider who preferred to remain anonymous.

ARC Ltd. hopes to provide up to $1.5 billion of coverage for 150 million people against drought, floods and cyclones in 30 countries by 2020. Sixteen countries have signed memorandums of understanding, a key step toward obtaining coverage.

Cyclone and flood programmes are in the research and development phase, a process that includes number crunching to make sure that necessary parameters and triggers are fairly calculated and correctly measured.

Indian Ocean countries such as Madagascar have expressed interest in cyclone coverage, notes Ms. Banda. It is due to be rolled out later this year. Several donors appear ready to help launch the flood scheme.

To ensure that payouts are used for disaster-mitigation purposes, ARC Ltd. plans to establish parameters for aid distribution and a monitoring system. “We need a foolproof methodology for the traceability of payouts,” says Ms. Banda, adding that one of her goals is to have African governments feel that the programme is theirs.

Beyond its current drought coverage, ARC Ltd could be well placed for expansion. But in an era of ever-tightening public budgets, national leaders also need to be convinced to shell out cash for premiums.

“We need to work with host countries in terms of financial trade-offs with respect to premium affordability,” said Ms. Banda.

The lack of deeply-rooted insurance markets also seems to present a barrier to many African countries. Of all premiums in sub-Saharan Africa, 80% are concentrated in South Africa. “Insurance is a relatively new sector,” observes Mr. Ngoma. “We don’t have a culture of insurance.”

However, South Africa’s dominance is set to be challenged by a number of promising countries. Nigeria tops the list, with Kenya and Ethiopia showing significant growth in insurance markets on the continent.

This is “something [leaders] never considered paying for before,” according to Mr. Young.

Malawi was among the first countries to sign on, partly due to its experience with a World Bank pilot programme for drought insurance in 2008–2011, noted Mr. Ngoma. “Our current minister of finance is an economist. He understands the advantages.”

To prime the pump for those not yet convinced, international donors and institutions such as the African Development Bank may be willing to subsidize premiums for a while, Ms. Banda notes, while cautioning the need to gradually reduce the role of outsiders. “The original concept behind ARC was that over time it would be mutually owned by the sovereigns of Africa.” 

Health Campaign