Africa launches its first pool for catastrophe drought risks

The pool will enable parametric insurance policies to be sold to African countries, providing them with post-disaster event financing that is predictable, with a rapid payout mechanism due to the parametric nature of the policies. The ARC agency has created a specialist hybrid mutual insurance company, ARC Insurance Company Limited (ARC Ltd), which is initially domiciled in Bermuda. ARC Insurance will issue parametric disaster insurance policies to a group of African governments, starting with Kenya, Mauritania, Mozambique, Niger and Senegal. The initial capital behind the insurer has been provided by Germany and the UK, which are also founding members of the mutual. To begin with, ARC has issued parametric insurance policies with a value of approximately US$135m. The policies will cover drought and each has been tailored to meet the needs of the covered African country. In addition to its own capital, Willis Group Holdings has secured US$55m of index-based reinsurance capacity from the international weather risk markets for the pool.hidePooling the risks from the group of African countries enables the reinsurance protection to be secured at a cheaper cost, making the whole project feasible. By pooling risk across countries within a region, the reinsurance market will typically give a better price than reinsuring the countries individually. “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,” commented Dr Ngozi Okonjo-Iweala, Chair of the ARC Agency Board and Nigeria’s Minister of Finance. Kenya’s Cabinet Secretary for the National Treasury, Henry Rotich, added: “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 and protect our agri-culture investments, thereby increas-ing productivity as well as promot-ing fiscal stability by preventing budget dislocation in a crisis.” ARC Ltd uses 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. A cost-benefit analysis performed by ARC Ltd estimates that spending one dollar on early intervention through parametric insurance from ARC could ultimately reduce the potential economic impact by as much as four and a half dollars. 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,” added Nobel Laureate Professor Robert Shiller. ARC Ltd will be managed by Marsh’s captive solutions practice in Bermuda. David Simmons, Managing Director of Analytics at Willis Re, said: “The underlying insurance policies issued by ARC Ltd are cutting-edge index-based coverages, with parametric triggers tailored to reflect each country’s specific rainfall requirements for growing staple crops. The calculation of claims to the programme is based upon satellite rainfall data, which is used to objectively determine whether a drought has occurred. This then allows claims to be calculated quickly, and as a result, funds can be deployed in a timely and efficient manner. This is one of the first times in Africa that the reinsurance process has become such a key instrument in achieving humanitarian and development goals.” Julian Roberts, Executive Director of Willis’s global weather risks practice, commented: “A mechanism such as ARC Ltd demonstrates the very best of what can be achieved when governments and the re/insurance sector work together, and has the potential to increase the resilience of African countries to the climatic challenges which they face.” Claire Wilkinson, Partner of Willis’s global weather risks practice, added: “We noted significant appetite for this risk from both the reinsurance and index-based weather market, which were very keen to support something so innovative and ground-breaking. Despite keen pricing, the core layers of the programmes were around three times over subscribed. It is heartening to see so much support from the re/insurance industry for a project that has the potential to do so much good.” Speaking to Commercial Risk Africa, Mr Simmons stressed the importance of getting aid to drought regions quickly. “If we can stop farmers from selling their much needed seed because their crop has failed, we can stop the cycle spiralling downwards and get the communities back up and running that much faster,” he said. At the same time, having the reinsurance helps reduce the likelihood of donor aid being absorbed. “If there was a sequence of very bad years, we don’t want the donor capital to be eroded, so the reinsurance acts as a back stop,” he explained. The full list of reinsurers on the programme is: New Re; Swiss Re; Hannover Re; Africa Re; Chaucer Syndicate; Liberty Syndicate; Endurance; Axis; Everest; Allianz Risk Transfer; Arch and SCOR. Mr Simmons said this is just the start of the programme. The pool is already in discussion with other African countries and he is hopeful the number of countries in the pool will increase rapidly in the next three to five years. If successful, he also predicts that the model can be rolled out to other areas, such as flood, as well as to other parts of the world.

Africa launches its first pool for catastrophe drought risks

Want to read this article?

Read Next

New product recall offering from Tokio Marine HCC Specialty Group

PoloWorks launches MGA incubator

Brazilian floods put focus on risk prevention failures as climate change hits

EU naval forces confirm Somali piracy attack in Gulf of Aden

Lloyd’s insurers prevail in ‘Zoombombing’ coverage fight

New product recall offering from Tokio Marine HCC Specialty Group

PoloWorks launches MGA incubator

Brazilian floods put focus on risk prevention failures as climate change hits

EU naval forces confirm Somali piracy attack in Gulf of Aden

Lloyd’s insurers prevail in ‘Zoombombing’ coverage fight

Want to read this article?

Read Next

New product recall offering from Tokio Marine HCC Specialty Group

PoloWorks launches MGA incubator

Brazilian floods put focus on risk prevention failures as climate change hits

EU naval forces confirm Somali piracy attack in Gulf of Aden

Lloyd’s insurers prevail in ‘Zoombombing’ coverage fight

Related Articles