African Risk Capacity: Insurance For African Development

In even the wealthiest African countries, private insurance is uncommon. However, insurance could mitigate the agricultural challenges Africa faces every year. Drought and flooding are particularly common natural disasters, and from 1994 to 2013 Africa suffered more droughts than any other continent–a total of 131–75% of which occurred in East Africa. Since 2000, each year saw an average of 341 weather-related disasters. Each disaster sets African development back as farmers and businesspeople are forced to sell their livestock and tools to buy food in times of crisis.

Enter African Risk Capacity (ARC). Created as a Specialized Agency of the African Union, its financial affiliate is a mutual insurance company, ARC Ltd, owned by African states–originally Kenya, Mauritania, Niger, and Senegal, but expanded in 2015 to also include Malawi, Mali and Gambia. The participating states pay premiums into the insurance pool, and when disaster strikes, measured objectively using weather data, ARC Ltd quickly makes a payout to provide resources to those affected. In the next four years, ARC hopes to attract a total of 20 to 30 member states, increasing ARC’s pool far beyond its current $180 million. ARC’s pool system is a promising example of African countries financing their own development and providing their own assistance.

Farming in Niger
Farmers in Niger dig half-moon ditches to capture rainwater after a drought. (Oxfam International, Flickr)

In its first year, ARC insured four countries with total coverage of $130 million, and ended up paying out $26.3 million after a drought in West Africa. That’s all part of the plan–because ARC covers so many African countries in different parts of the continent, which means one insured country may be affected by a drought, while the others could remain unaffected. Membership in this risk pool plan requires that countries hold a Certificate of Good Standing with ARC, which requires signing off on an approved contingency plan, which then forms the basis for use of payouts when they occur. Payout funds in West Africa in early 2015 provided support for 1.3 million people and over 600,000 livestock.

This “pool” insurance model is an improvement from the “pass-the-hat” donor pledge conference model employed among wealthy countries after a natural disaster. Collecting donations or international aid pledges takes many months–too slow in the event of a natural disaster–and prevents accountability when crises are mishandled. ARC’s pool ensures that money is available before a crisis takes hold and that resources can be mobilized quickly to target those most in need. Research shows that for every dollar spent on ARC’s model of early intervention and risk pooling, four and a half dollars are saved that would otherwise be spent on disaster relief and repair.

ARC uses a ‘parametric’ system that immediately triggers payouts when measurable environmental factors–excessive or insufficient rainfall, for example–are projected to have an impact–number of food insecure people or buildings damaged, for example–above a pre-defined threshold. ARC operates under the principle that weather cycles are relatively predictable–so the risk can be assessed and priced–and makes use of satellite technology to track storms, droughts, and cyclones. Early warning and risk modelling systems, like their new Africa RiskView software, can both monitor slow-onset disasters as they develop, quickly estimate impacts, and assess payout amounts after a disaster strikes.

The benefit of African-owned insurance is clear: rather than waiting for developed countries such as the United State or Japan to sponsor relief and reconstruction after natural disasters, African states sponsoring their own recovery efforts ensures that aid is targeted, efficient, and fast. The ultimate goal of companies like ARC is to end reliance on foreign assistance and to encourage reliable, sustainable growth within Africa.

In order to continue and expand its services, ARC is looking to donor countries for assistance in the short to medium term. ARC is seeking financial support for country interaction, client management, and software development–all steps toward general innovation to ensure that they remain on the cutting edge of available technology. The next step involves development financing to support premium payments for existing and new African countries as they embed insurance premiums in their budgets and further build capacity to manage response to natural disasters.

Article Published in on December 22, 2015.

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