African Risk Capacity (ARC) members to get premium financing support

On the margins of the COP26 climate conference in Glasgow yesterday, a significant vote of confidence in the African Risk Capacity’s (ARC) parametric climate insurance products was announced, as the German government said it would provide €18 million in premium support for qualifying ARC members.

Encouraging uptake of climate and disaster insurance, be that parametric or another structure, is often hindered at the sovereign level in regions like Africa due to the costs of premiums.

Hence, the €18 million commitment to establish a Premium Support Facility for African governments and humanitarian agencies that want to purchase climate related insurance through the African Risk Capacity (ARC) is another welcome step.

Since 2014, 62 ARC parametric disaster and climate risk transfer policies have been signed by African Union Member States, providing cumulative insurance coverage of US $720 million and protecting as many as 72 million vulnerable populations in participating countries.

The Premium Support Facility is designed to subsidise insurance premiums to start off, with the amounts of subsidy decreasing in future years, as countries and organisations such as NGO’s are able to take over the costs of their own risk transfer.

Growing the ARC risk pool is also a positive as economies of diversification and scale, as well as in terms of reinsurance protection can be achieved.

Effectively, the larger and more diverse the ARC risk pool becomes, the greater the efficiencies that can ultimately be handed down in terms of reinsurance synergies and reductions in relative premium costs.

Commenting on the news, Christian Krämer, Member of the Management Committee at KfW Development Bank said, “Germany has been a long-standing supporter of the African Risk Capacity. Earlier this year, in Germany we were affected by devastating floods – we have experienced ourselves the importance of preparedness and the vital role that insurance can play in recovery. We are therefore delighted to be able to extend support to African nations who have been so badly affected by the covid-19 pandemic, so that they can take steps to prepare well to face the rising challenges of climate change.”

Ibrahima Cheikh Diong, United Nations Assistant Secretary-General / Director-General of the African Risk Capacity Group added, “We are extremely delighted about the consistent support of the German Government to disaster risk reduction and mitigation in our Member States. The grant is a clear testimony of the value of smart partnerships for smart disaster risk management and financing for early action. Through this assistance, we are optimistic that other partners will embrace our pitch for a Continental Premium Support Facility to help institutionalize sovereign parametric insurance culture in the region”.

Christina Bennett, CEO, Start Network and an organisation that has purchased ARC Replica parametric coverage itself, to benefit its network of NGO’s, also commented, “We are delighted to hear of Germany’s increase in support to ARC. By funding premiums for drought and tropical cyclone insurance in African countries, Germany is helping to ensure that vulnerable communities are better protected from the escalating risks that they face as a result of the climate crisis.”

The African Risk Capacity has itself also been striving to add diversification to its risk pool, with initiatives such as plans to expand into flood risk, an expansion of the ARC client base to include non-sovereign actors, ARC’s recent plan to further expand its risk pool by underwriting inwards reinsurance, and the writing of its first parametric tropical cyclone cover as well.

These efforts and continued work to enable other countries in Africa, such as Somalia, to take up parametric disaster insurance promise to further expand ARC’s risk pool and therefore its ability to access reinsurance markets more efficiently, providing greater benefits to those it protects.