Africa: $150 million for climate-related disaster risk insurance

By Bill Hinchberger 21 December 2015

A village meeting for farmers who took out livestock insurance to receive their first payout after a prolonged drought in northern Kenya. Could insurance be a tool to bridge the humanitarian financing gap? Photo by: Neil Palmer / CIAT / CC BY-SA

Following COP21, African Risk Capacity announced it had rounded-up over $150 million in pledges during the Paris climate change conference from donors including the United Kingdom, Germany, the United States, France, and Canada.

As a specialized 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, the ARC is the most prominent of three “risk pooling” initiatives, together with the Caribbean Catastrophe Risk Insurance Facility and the Pacific Risk Pool.

AU member countries sign up receive payouts earmarked for relief efforts when hit by extreme weather events and natural disasters and the ARC has already paid out $26 million to Senegal, Mauritania and Niger to help them deal with recent droughts.

“For most insurance companies that would be a nightmare,” said Simon Young, CEO of the ARC Insurance Company Ltd, “but we’re prepared.”

The ARC currently covers eight countries, including The Gambia, Kenya, Malawi, Mali, and Zimbabwe. It hopes to provide up to $1.5 billion of coverage against drought, floods and cyclones for 30 countries by 2020.

The push for climate change insurance dates back to 1992 and the Earth Summit in Rio de Janeiro, Brazil, Young explained. “That was the big ask of the island states, and they’ve maintained that position,” he said, adding that this evolved into the “loss and damage” debate in Paris.

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In the ensuing decades, insurance has become “part of the solution,” he said. Proponents agree that nobody wants “to make it look like developed countries are giving money to insurance and neglecting [other kinds of assistance].”

Rewinding to the start, Young explained that countries are required to develop contingency plans before they are allowed to purchase coverage. Not only does this encourage preparedness, it also makes sure they know what they’re doing when they lay down cash for premiums. “We put barriers before they buy something that they’re not sure they wanted,” he said.

ARC calculates that every $1 in premiums translates into at least $5-worth of traditional response — with quicker delivery. It aims to cut its response time from the current six weeks, but even now it beat the United Nations appeal for the Sahel, according to Young. “One of the review criteria is to get the money to individual households quickly,” he said.

From first interventions, ARC has learned the importance of good governance. Sometimes the most well-meaning of regulations can backfire when the goal is speed. Some governments have detailed restrictions on, for example, not importing rice for public assistance. “Most of these rules are in place because donors pushed for them [to curb abuses],” he said. “But in an emergency they’re a hindrance.”

On the other side of the equation, ARC has garnered support from 18 leading reinsurance companies, including seven of the top 10. “They are not going to do work on the ground, but they like to have a huge diversified portfolio,” he said. “They aren’t going to underwrite anything else in Mali, [but] if we can package it and get it to scale, they are interested.”

Meanwhile the World Food Program has agreed to match ARC’s coverage of African governments, which would be used to fund the WFP’s own relief efforts.

“There’s a huge gap in the financing of humanitarian responses,” Young said. “If we move faster we can help make up the gap.”

Leading figures in the development and humanitarian worlds, including Oxfam International Executive Director Winnie Byanyima, have criticized efforts by some donors to tally support for insurance schemes as development assistance for climate change adaptation.

While aware of the debate and in agreement that the critics have a point, Young asserts that the ARC cannot forever remain dependent on interest-free loans from donors. “We have to be profitable,” he said, concluding that donors should only be able to account as aid the amount equal to the actual risk they are assuming.

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About the author

Bill hinchberger
Bill Hinchberger@hinchberger

Bill Hinchberger is Devex's Paris correspondent. In his spare time, he's a freelance writer, communications consultant and educator. A native of California, he lived in Latin America for over two decades, reporting for media such as The Financial Times and Business Week. He also served as president of the São Paulo Foreign Press Club and founded the online travel guide BrazilMax.com. Assignments have taken him to over 30 countries, from Cuba to Egypt, India, Kenya, Turkey, and beyond.


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