African Risk Capacity (ARC) gets $150m in support from COP21 countries

The African Risk Capacity (ARC), Africa’s first sovereign catastrophe insurance pool, is set to receive $150 million in support pledged by countries attending the Paris COP21 climate change talks over the last fortnight.

The African Risk Capacity (ARC) has received a significant amount of coverage and support over the last fortnight. ARC is seen as a compelling model for catastrophe, weather and climate risk transfer, insurance and reinsurance for emerging or developing regions and economies of the world.

It’s model of linking sovereign nations risk adaptation and resilience planning to the delivery of climate or weather risk transfer and insurance is seen as a potential approach for regions outside of Africa. ARC’s ambitious targets for growing the coverage it provides is also a key reason for the support it is receiving being needed, to assist that goal.

The U.S., UK, Germany, Canada and France have all committed to support the ARC going forwards, according to reports. As we wrote at the time, U.S. President Obama committed financial support to ARC, as well as other risk pooling initiatives. Canada committed a further investment in the G7 initiative to expand insurance penetration globally.

ARC has ambitious targets for growth, which make the continued support it receives vital. As well as growing the number of African sovereign countries that are covered, ARC also intends to double the coverage it provides to as much as $1.5 billion by 2020.

One way it wants to achieve this growth in coverage is by opening up its parametric weather and climate insurance products to international organisations, such as United Nations agencies and non-governmental organisations (NGO’s). That can ensure recovery from disaster is swifter, by protecting the funding that is vital to recovery and continuity of international aid and charity type work in a sovereign nation.

ARC is also working on its Extreme Climate Facility (XCF) initiative, a project which aims to result in climate change catastrophe bonds, an initiative that was announced in 2014.

The XCF is designed to access private sources of capital and to diversify the sources of funding available for climate risk financing. It is expected to be structured as a catastrophe bond program, meaning its financial obligations to countries will be securitized, issued as cat bonds with multi-year terms and financed by the capital sourced from private investors and the capital market, with ILS investors expected to be attracted to any notes issued by the XCF.

This work again requires financing, to get the initiative past the conceptual stage and bring the first climate cat bonds to market. The support from these countries will be important in helping ARC to reach its targets over the coming years.