African Risk Capacity (ARC) to add parametric coronavirus insurance

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The African Risk Capacity (ARC), a parametric sovereign disaster risk insurer for African nations, is planning to add coronavirus protection to its planned outbreaks and epidemics parametric insurance product, which it aims to have available from 2021.

african-risk-capacity-logoThe work to develop a protection product based on a parametric index to support outbreak and epidemic insurance and risk transfer at the sovereign level and backed by global reinsurance capital has been underway since 2016.

But given the outbreak of the current Covid-19 coronavirus pandemic, the African Risk Capacity (ARC) is now planning to add coverage for coronavirus outbreaks to its offering before its launch.

Speaking during a television interview recently, Robert Kwame DeGraft Agyarko, Lead Advisor, Outbreak and Epidemics, African Risk Capacity (ARC), explained the need for a response to the coronavirus in Africa and for resilience building.

He explained, “When you look at the projections that have been made, by the IMF and the economic commission of Africa, there is clearly going to be impact, negative, on our economies. There is a projection of about a 3% to 8% cut to GDP.

“There are two things we need to do, one there’s a public health response and the second is an economic recovery package or response.

“The objective, with the public health response, is geared to stop the spread of the virus and to build lasting systems that can be activated for future outbreaks and epidemics.

“On the economic side, we must ensure that there is food security and basic services are provided to the most vulnerable and the rest of the economy, maybe focus on the economic recovery of small businesses and livelihoods, through loans and a stimulus package.”

Specifically on the ARC initiative to launch a parametric outbreak and epidemic insurance product for African nations, he said, “Since 2016 we have been producing an outbreaks and epidemic product, with the support of Africa CDC, the WHO and other partners, funded by the Rockefeller Foundation and the Swiss Development Corporation.

“The product seeks to provide countries with early intervention financing, so we work with countries to model and understand the risk that they face, cost these risks and then insurance is provided to underwrite this.

“The main objective is that as soon as you have a disaster, this will come into help you.”

The African Risk Capacity (ARC) has underwritten some $600 million of parametric insurance premiums over the years and made around $60 million of payouts to African nations impacted by droughts.

The risk pool has been steadily growing, resulting in the need for more reinsurance capacity to support ARC’s expansion.

With the addition of coverage for future coronavirus outbreaks, it will be interesting to see whether ARC can make this happen in an affordable and economical way, as reinsurance costs may be significantly higher given the current crisis.

“It will be launched for cover starting 2021, it was covering Ebola, meningitis, Lassa fever, but given what is happening now we are modelling to include coronaviruses,” Agyarko said

“The main aim here is to provide protective cover to countries very early in an outbreak, so that a country would not have to rely on external donor support and reactionary, but have a more proactive response.”

Adding, “We were going to present this to ministers of finance at a meeting that was planned at Acra late last month, but it got called off due to Covid-19.

“Countries just have to show their interest in this and we will start the work with them in assessing their risks and working around this.

“It is sovereign insurance, so here we work with governments, ministries of health and finance will be the main entry points to engage here. The African Union will be behind us, in making sure that the continent is provided this security for health emergencies.”

The cost of reinsurance capital to support ARC’s outbreak and epidemic parametric insurance product will likely define how effective a protection it can provide, as in how low-down it can attach in terms of probability, as well as its cost and how affordable it will be.

The global reinsurance markets have contracted available capacity for pandemic exposures at this time, but by 2021 this may have relaxed somewhat.

The modelling work will also be crucial here and if robust enough there is a chance that the capital markets may take a look at providing reinsurance to back the ARC risk pool more substantially in future.

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