The United Nations World Food Programme (WFP) has become the first to offer so-called Replica parametric risk transfer protection to countries, as a way to secure rapid financing for humanitarian disasters, using an insurance product provided by the African Risk Capacity (ARC).
Back in 2015 the African Union’s African Risk Capacity (ARC) said it would expand the target client-base for its parametric and weather-index based insurance products beyond just sovereign governments to include international organisations, such as United Nations agencies and non-governmental organisations (NGO’s).
Now the first arrangement has been struck, with the World Food Programme (WFP) set to be the first to provide parametric insurance via the ARC Replica product.
It’s another step towards the expansion of the ARC risk pool that is targeted, which has been backed by capacity from the traditional reinsurance and insurance-linked securities (ILS) fund sector.
The initiative has been supported by the WFP and the Start Network, with Germany’s Federal Ministry for Economic Cooperation and Development (BMZ) committing EUR 10 million to help fund it through 2019, with the funding channelled through the German government-owned development bank, Kreditanstalt für Wiederaufbau (KfW).
To begin the WFP will provide this parametric drought coverage to Mauritania, which will be followed shortly by Mali, both of which countries are prone to recurrent drought conditions.
Pay-outs can be triggered if certain indices measuring climatic variables including low rainfall or reduced vegetation are confirmed by satellite data, providing a rapid paying source of humanitarian financing, structured as a parametric insurance product and backed by the global reinsurance markets.
“The Replica pilot is an excellent example of how WFP and Governments can pool expertise and innovative financing to provide early and coordinated response in the face of shocks, thereby contributing to national preparedness and response efforts,” explained Jean-Noël Gentile, WFP Country Director in Mauritania. “This is absolutely critical in the Sahel, where early interventions before the peak of the lean season have the potential to reduce the human and livelihood costs of droughts.”
“We support ARC Replica as an outstanding initiative which builds up capacities within international organizations to purchase ARC’s drought insurance to improve preparedness, coordination and financing in the case of a disaster,” added Thomas Duve, KfW Director of Southern Africa/Regional Funds. “Through the German contribution, BMZ/KfW hopes to encourage other donors to provide funding to expand ARC Replica coverage to additional ARC member countries”.
Of the funding from the BMZ via KfW, the WFP will receive EUR 5.8 million to pay for ARC Replica insurance policy premiums for Mali and Mauritania.
In the case of triggering and a maximum pay-out, the organisation said that the policies will release US$ 15.3 million in funds that can help to provide early humanitarian assistance to as many as 240,000 people.
“ARC builds on the diversification of weather patterns across Africa to help countries manage their disaster risk as a group in a financially efficient manner through risk pooling and risk transfer,” stated Mohamed Beavogui, the Director-General of ARC. “The ARC Replica initiative is an example of good solidarity where the international community complements national efforts to protect vulnerable populations.”
The ARC Replica product and how the World Food Programme intends to use it also continues the theme of resilience building, that ARC has at its core.
Along with the policies the WFP develops an operational plan for each country that is covered, helping to identify how resources and assistance can be best moved and delivered in the event of a drought occurring.
By combining the parametric insurance protection, with a resilience building plan, the humanitarian funding can not only be disbursed rapidly, but it can also ensure the funding gets to the right places.
ARC’s parametric product range is providing meaningful insurance protection to governments and now to non-governmental U.N. agencies as well, enabling humanitarian financing to be delivered using modern, predictable and understandable means, alongside the plans to enhance resilience and deliver financing in the best possible way.
It is only through the actions of donors like Germany, as well as the efficiency of global reinsurance markets, that initiatives like ARC are possible.
As this risk pool expands it will make it increasingly likely that the ILS market will be able to provide more of the capacity required to back the ARC portfolio of parametric weather risk and in future there could be the potential for catastrophe bonds to back the facility as well.