Madagascar takes up new African Risk Capacity parametric cyclone insurance

The African Risk Capacity (ARC), a provider of parametric disaster insurance products to countries and now other entities in Africa, has launched a parametric tropical cyclone insurance product for African nations and Madagascar has become the first to take it up.

It’s taken a long time to get to this stage, as a parametric tropical cyclone insurance product from the African Risk Capacity (ARC) is something that was under discussion and we first wrote about as long ago as in 2015.

Now, ARC said it is proposing a new parametric tropical cyclone insurance product for African countries in the South West Indian Ocean (SWIO) region to cope with the devastating effects of major storms.

Designed to provide “predictable and rapid financing for early response to cope with emergency situations caused by tropical cyclones,” ARC sees the product as a “significant milestone to building resilience to climate-related disasters on the African continent.”

On average, this South West Indian Ocean (SWIO) region experiences 13 tropical cyclones a year, with wind speeds above 63 km/h and possibly exceeding 200 km/h.

There has been a renewed interest in parametric insurance coverage since the 2019 season, that saw cyclones Idai and Kenneth impact Mozambique, ARC explained.

ARC has now developed a risk model capable of estimating the risk and economic losses due to tropical cyclone events which has been adapted to suit the SWIO countries, such as Mozambique, Madagascar, Comoros, Mauritius, Seychelles, and Tanzania.

“Our goal is to continue to diversify our product offering to meet the needs of our Member States effectively. This new offer will allow our Member States to better anticipate and manage extreme weather events while ensuring that their impact on the population is mitigated,” explained UN-ASG and African Risk Capacity Group Director-General, Ibrahima Cheikh Diong.

Madagascar has become the first country to take out this parametric tropical cyclone insurance product, with assistance from KfW for premium support to cover the 2020/2021 season.

As part of the implementation of the national policy on disaster risk management, Madagascar has subscribed to the new insurance product against Tropical Cyclones offered by the ARC Group to better protect the population against the enormous damage caused by extreme climatic events but also allow the country to recover quickly when affected by cyclones,” H.E. Richard Randriamandrato, Minister of the Economy and Finance, Republic of Madagascar stated.

The move is another expansion of the ARC risk pool, which will aid it in securing greater reinsurance synergies through the added diversification it brings as well.

ARC relies on efficient access to reinsurance capital to underpin its ability to pay claims against the growing risk pool and expansion and diversification are both key.

Recent developments that also add diversification to the risk pool have included plans to expand into flood risk, an expansion of the ARC client base to include non-sovereign actors, and ARC’s recent plan to further expand its risk pool by underwriting inwards reinsurance.

All of these initiatives, as well as today’s news of the first parametric tropical cyclone cover, promise to build out ARC’s risk pool and ability to access reinsurance markets more efficiently, with economies of scale and diversification set to be realised come renewal time for its program.