Parametric insurance products are slowly gaining momentum in Africa, but according to Lesley Ndlovu, CEO of the African Risk Capacity (ARC) Group’s insurer, Arc Ltd., more countries need to embrace parametric risk transfer, especially as Africa tries to fight the effects of climate change.
ARC Ltd. now provides parametric insurance to 35 sovereign member states across Africa and ARC is seen as an initiative requiring more investment and support as a key tool in the climate transition for African nations.
As we wrote over the summer, the African Risk Capacity (ARC) wants to become the continent’s disaster risk financing provider of choice, but there is a need to increase its capacity and lower the costs of coverage for country members.
Insurance is just one lever for Africa, when it comes to climate change, of course, with the continent needing some US$1.6 trillion is needed for the continent to meet its nationally determined contributions (NDCs), according to the African Development Bank.
But parametric insurance can be a very valuable source of risk financing when climate disasters strike, making its use alongside other forms of climate and disaster financing for resilience, response and recovery important.
“One of our greatest challenges is to forge a better understanding of how parametric insurance fits into disaster risk management, while also addressing the cost of insurance premiums,” explained ARC Ltd. CEO Ndlovu.
“Our sovereign risk pools offer a solution, as countries share the risk and cost. Once our member states have completed a capacity-building programme, they become eligible to join a risk pool.”
ARC pools disaster and climate risks and leverages reinsurance market efficiencies, all to make the costs of parametric insurance coverage more affordable for Africa’s sovereign buyers.
To-date, ARC Ltd. has paid out approximately US $125 million in claims, half of which went to a single pool last year.
With the COP27 climate conference approaching, Africa may be looking to that event for a sign that the world will support its climate transition needs.
But ARC believes, “It has never been more critical for the continent to look to strategic partners who can assist from within, while acknowledging that parametric insurance may be the lifeline it has been seeking.”