The African Risk Capacity (ARC), currently a catastrophe insurance pooling facility for Africa, is targeting a 2017 launch date for the first sovereign insurance cover for disease outbreaks and epidemics, which is being developed in response to the Ebola crisis.
Artemis discussed ARC’s commencement of work to explore an insurance product to cover disease outbreaks like Ebola last week, when we also covered the World Bank’s increasing interest in providing a sovereign pandemic risk financing tool, which could resemble catastrophe bonds.
According to the ARC, its Member States requested the development of an outbreak and epidemic insurance product at this week’s African Union Summit in Addis Ababa. ARC currently provides catastrophe insurance cover for drought to five countries, but hopes to expand to as many as 12 in year-two.
Dr. Richard Wilcox, founding Director General of ARC, commented; “While pricing models will be more complex than in ARC’s existing drought product, and flood and tropical cyclone modeling, product development is feasible and will reflect true risk. We aim to insure the first four participating states in 2017.”
That’s a very rapid development time to create a product which will require new models to be constructed, but ARC has a talented team of scientists with significant experience in the creation of indices and triggers for unique insurance and reinsurance products.
Disease outbreaks create a requirement for immediate funding, similar to the occurrence of a natural disaster, ARC believes that “new applications of financial tools like insurance can significantly improve the speed of funds availability and shorten the time lag between event and response.”
“Ebola is not the first virus to threaten the world, and it won’t be the last. Unless we prepare for the next epidemic, we will find ourselves forever nailing down outbreaks just in time to see the next ones pop up. Epidemic risk financing is going to be a key component of the overall preparedness and risk management strategy. We are working with regional organizations such as ARC, global organizations
as well as financial institutions in providing analytics and institutional knowledge required to architect such financing schemes.” said Dr. Nathan Wolfe, founder and CEO of Metabiota, a pioneering firm in the analytics, management and mitigation of epidemic threats.
The disease outbreak and epidemic insurance policies will be linked to African governments’ resilience efforts and contingency plans, in a similar way to ARC’s drought insurance product. This ensures that governments are taking efforts to become better protected and more resilient, rather than simply relying on the insurance cover. Typically the premiums would be higher the lower the resilience and contingency efforts are seen to be in peer-review.
“African Risk Capacity is an example that we should look at as part of our success stories. Firstly, this is pooled resources of Member states to address an African problem; secondly they work to strengthen capacity in Member states; and thirdly they have already started paying out to Member states facing drought this year,” commented Dr. Nkosazana Dlamini-Zuma, Chairperson of the African Union Commission in an opening speech at the AU Summit last week.
“ARC is on the cutting edge of innovative finance for development with a proven track record of being able to tailor products to the needs of sovereigns,” noted Dr. Lars Thunell, Chairman of the ARC Insurance Company Board of Directors and former head of the International Finance Corporation.
ARC is an excellent example of the innovation that is possible with index-insurance and parametric trigger techniques, much of which were originally put to use in catastrophe bonds and weather derivative products, allowing for risks to be covered based on factors that allow for rapid payouts to be made. The speedy payout is crucial in sovereign risk transfer and even more so in countries which are still developing.
It will be interesting to see how ARC secures reinsurance coverage for what will effectively be a pandemic insurance product. Will a World Bank pandemic cat bond be the provider of reinsurance, or will the traditional market step in. Competition to provide any reinsurance capacity required will likely be high, ensuring that ARC can get very attractive pricing which will ultimately enable the outbreak and epidemic product to be sold more cheaply to the countries that need it.