ARC adds five new countries, taps ILS capacity for reinsurance renewal

by Artemis on July 6, 2015

The African Risk Capacity (ARC) has enlarged its risk pool, adding five new countries to those protected by the parametric insurer, growing the risk pool to $192m of capacity and utilising $70m of global reinsurance cover, which includes some ILS or collateralised protection.

The renewal of insurance policies and reinsurance coverage at ARC takes place on May 1st, and for the 2015/2016 policy year Burkina Faso, Malawi, Mali, The Gambia and Zimbabwe are joining, taking the aggregate limit to $192 million across nine countries.

This represents impressive growth since the African parametric catastrophe insurance pool launched in May 2014, then protecting only member states Niger, Senegal, Mauritania and Kenya against the impacts of drought, with an aggregate limit of $129 million.

According to ARC the total premium from the new, nine member countries amounts to $26.7 million.

ARC Ltd’s CEO, Dr. Simon Young said; “The ongoing programme of awareness and capacity building being implemented across Africa by ARC Agency, together with the success of ARC Ltd in its first year, have encouraged more countries to join the pool which has in turn increased the diversification benefits of the risk pooling, providing a win-win for all stakeholders.”

The recent, May renewal has also seen ARC increase the amount of exposure transferred to international reinsurance markets, up from $55 million during its first operational year, to $70 million for the current policy year.

Similarly, the increase in pooled risk to the global reinsurance sector has seen the panel of reinsurance capital providers grow to 18, from the 12 reinsurers participating during ARC’s 2014/2015 policy year, with 7 of them new markets in 2015.

So far, AXA and Munich Re have confirmed their involvement with ARC, both providing reinsurance capacity to the scheme.

Among the other reinsurance markets, ARC told Artemis that a number represent insurance-linked securities (ILS) players whose capacity has been fronted through relationships with rated reinsurance carriers.

ARC Ltd’s CEO Simon Young explained the reinsurance market’s response to the African Risk Capacity’s renewal, saying that it was; “Fantastic – the reinsurance capacity didn’t increase dramatically but we expanded the number of markets (lost 1, gained 7), and the interest was at least as keen as last year despite the reinsurance panel taking losses. And pricing was commensurately good.”

On the subject of collateralised markets and ILS participation in ARC’s reinsurance renewal, Young explained that so far ILS markets have not participated directly yet. This is partly due to ARC Ltd’s desire to keep the renewal on a single slip until capacity requirements or price make it conducive to invite fully collateralised participation, and also as a consequence of the deal size available for individual markets at this time.

However the ILS market is now tapping the ARC renewal, just not directly. Young commented; “There are several ILS markets ultimately holding ARC risk – they are just doing it on rated reinsurance paper.”

“The programme renewal again demonstrated the high appetite across both traditional and alternative markets for diversifying risk, particularly when packaged in a transparent parametric programme, and particularly when associated with a high profile and innovative project such as ARC,” Young continued.

Andreas Molck-Ude, Chief Executive Officer (CEO) at NewRe, the reinsurance vehicle used by Munich Re to provide reinsurance capacity to ARC, commented on its involvement; “We are very happy to be part of this programme, and again to support this new sovereign insurance pool.”

Earlier this year, and reported at the time by Artemis, ARC made its first payout of $25 million to three member countries following drought experienced throughout 2014. Revealing just how efficient and important the protection offered through ARC is to its member states, ensuring the agricultural sector can continue in the face of adverse weather.

The benefits, efficiency and success of ARC was also highlighted recently by G7 leaders, who singled out ARC as a successful risk insurance facility for vulnerable, poorer people of the world, and a model that should be built on and from which the industry and world leaders can learn.

Part of the G7 initiative includes a vision of insuring up to 400 million more people in the world’s most vulnerable areas by the year 2020, and G7 leaders praised ARC as a “model upon which to develop catastrophe insurance solutions in vulnerable regions.”

Dr Richard Wilcox, one of the founders of ARC, commented; “If the G7 translate their commitment into real action we can achieve the target.

“In Africa, the capacities, technology, and national demand are in place to more than triple coverage through ARC Ltd in the next few years.

“If the G7 initiative also brings the traditionally funded international actors, like the UN humanitarian emergency system, into the risk management framework established by ARC, we can readily double that coverage, bringing greater resilience to climate change to hundreds of millions of Africans.”

Dr. Lars Thunell, Chairman of the ARC Ltd Board of Directors and former CEO of the International Finance Corporation, said; “ARC has broken new ground in combining science, political ownership and risk pooling to address catastrophes and food insecurity, and showcases the benefits of African Government-led initiatives to build resilience to climate risk.”

The successful May 1st renewal ARC witnessed signals continued high appetite across both traditional and alternative markets for diversifying risk, helped by the ventures transparent parametric programme.

Looking to the future, ARC hopes to increase its African member countries to 20 or 30 in the next four years. At the moment the insurer remains solely providing drought coverage using a modelled loss index based on satellite rainfall data, but hopes to launch coverage for tropical cyclone and flood risks within the next year.

The organisation also revealed plans last year to establish a platform to issue its own parametric climate change catastrophe bonds, and is also looking into insuring African states against infectious disease epidemics.

Also read:

Interview: Where next for African Risk Capacity, Dr. Simon Young.

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