African Risk Capacity in first payout of $25m to three countries

The African Risk Capacity’s (ARC) pioneering catastrophe insurance pool, which operates as the ARC Insurance Company Ltd. (ARC Ltd), is set to make its first payout, totalling $25 million to three participating countries.

Senegal, Niger and Mauritania will be awarded funds resulting from drought experienced during 2014. The report notes that the three regions paid a combined premium of approximately $17 million, and Senegal is to receive the highest payout of more than $16 million.

The ARC scheme is Africa’s first parametric catastrophe insurance pool and was launched in May last year to provide regions with post-disaster financing capabilities, as reported at the time by Artemis.

Interestingly, part of the report states; “In July, Africa Risk View software detected that the December harvest would be affected by the late onset of rain, the Senegalese government responded and began planning it’s response in September.”

A combination of parametric policies and ARC’s comprehensive Africa Risk View (ARV) software enables rapid payout for impacted regions, as extensive historical drought data, risk management tools and peril knowledge provide an element of predictability.

By utilizing the ARV software, ARC and the relevant regions are able to asses and prepare a payout many months in advance, meaning that post-event financing and redevelopment can happen fast, and that the most vulnerable people are reached first.

But it’s not just a premium ARC participants are required to fulfill in order to qualify. To ensure fast, effective and relevant payouts are received, and to ensure the resilience of a country is strengthened, each member must complete several processes.

One of these is the full customization of the ARV to the respective national context, which takes a year to complete.

On their website ARC describes this section of the process; “One of the objectives of the year-long ARV customization process is for countries to better determine to what extent exogenous factors like drought are the predominant risk factor in their country and thus if participation in ARC will bring potential efficiency gains.”

Contingency planning is also an important and effective aspect of the ARC programme, which again potential member countries must complete in order to receive payouts.

ARC says this part of the preparation process “allows participating governments to make evidence-based decisions, with a clear understanding of the financial resources available to them in times of disaster and the types of activities required to save lives as well as livelihoods.

The final two requirements of participating countries is the determining of risk transfer parameters and the signing of a Memorandum of Understanding (MoU). The latter relates to an engagement agreement between the country and the ARC Agency.

The company’s website describes this as a collaborative effort between the country and “the ARC Secretariat in an intensive capacity building programme to prepare in-country government staff for the prospect of risk transfer to the international market.”

Once the required processes have been completed the country receives a Certificate of Good Standing from the ARC Agency Governing Board, pays a premium and becomes a member of the catastrophe insurance pool.

ARC’s extensive work with potential member countries is proving to be hugely beneficial. As mentioned previously the ARV software predicted Senegal’s December drought almost half-a-year earlier, meaning that work could be done on financing and redevelopment before the event took place – resulting in a speedy post-disaster payout.

An intense and comprehensive pre-approval process also ensures the fund goes beyond just post-event financing. Working closely with member countries’ Governments and utilising their local knowledge helps to educate and build resilience, so that vulnerable African nations are less reliable on foreign intervention during a testing drought period.

ARC also notes that although the ARV tool is focused solely on drought, work is on-going to include a flood risk facility in the future.

Another financial structure ARC is set to utilise is the use of climate change catastrophe bonds, under its Extreme Climate Facility (XCF). The multi-year funding mechanism was launched last year and aims to protect African states against climate related risks, as reported by Artemis.

The firm discuss the development of the XCF programme on their website; “ARC is working towards the goal of having an effective and fair XCF design in place when nations convene in Paris in 2015 for the UN Climate Change Conference with the aim of issuing the first catastrophe bonds in 2016.”