G7 Leaders Endorse African Risk Capacity Model

July 6, 2015

G7 leaders have singled out African Risk Capacity [ARC] as a model upon which to develop catastrophe insurance solutions in vulnerable regions.

ARC Ltd was formed in late 2013 as the financial affiliate of ARC and is registered in Bermuda as a mutual insurer. The entity issued its first insurance policies on 1 May 2014.

During the 41st G7 summit in June, leaders pledged to insure up to 400 million more people in developing countries against climate change risk by 2020 and to support the development of early warning systems in these regions.

To reach this goal, they pointed to ARC as well as the Caribbean Catastrophe Risk Insurance Facility, an equivalent pool for the Caribbean, as successful existing risk insurance facilities upon which to build and from which to learn.

Dr Richard Wilcox, who led the establishment of ARC, said: “If the G7 translate their commitment into real action we can achieve the target.

“In Africa, the capacities, technology, and national demand are in place to more than triple coverage through ARC Ltd in the next few years.

“If the G7 initiative also brings the traditionally funded international actors, like the UN humanitarian emergency system, into the risk management framework established by ARC, we can readily double that coverage, bringing greater resilience to climate change to hundreds of millions of Africans.”

ARC, through its affiliate insurance mutual African Risk Capacity Insurance Company Ltd [ARC Ltd], insures participating African nations against the risk of drought using a modelled loss index based on satellite rainfall data. ARC Ltd was capitalised through 20-year interest-free loans totalling ~$95mn from the UK development agency DFID and German development agency KfW on behalf of BMZ.

To become a member of ARC Ltd, pre-approved contingency plans have to be in place which describe how insurance pay-outs will be used should the coverage be triggered.

ARC Ltd has already paid out ~$26.3mn in its first policy year after three of the participating countries in western Africa suffered low rainfall.

A key feature of ARC is its quick pay-out time and it is notable that Senegal, Mauritania and Niger had already received ~$16.5mn, ~$6.3mn and ~$3.5mn respectively by the time the UN had launched a mid-February appeal to fund humanitarian support in the Sahel.

Pay-outs will ultimately benefit over 1.3 million food-insecure people and close to 600,000 livestock across the three countries.

Chairman of the ARC Ltd Board of Directors and former CEO of the International Finance Corporation, Dr Lars Thunell said: “For ARC to be held up by G7 leaders as the model for disaster risk management in developing countries is testament to its winning formula.”

“ARC has broken new ground in combining science, political ownership and risk pooling to address catastrophes and food insecurity, and showcases the benefits of African Governmentled initiatives to build resilience to climate risk.”

This year, ARC is expanding its catastrophe insurance pool with Burkina Faso, Malawi, Mali, The Gambia and Zimbabwe expected to join the pool for 2015/16 growing seasons.

In its first year, the pool insured Niger, Senegal, Mauritania and Kenya for $129mn in total losses, reinsuring $55mn in the international markets.

With the additional five countries expected to join, the total coverage is set to rise to $192mn this year, with over $70mn reinsured.

ARC Ltd CEO Dr Simon Young said: “The ongoing programme of awareness and capacity building being implemented across Africa by ARC Agency, together with the success of ARC Ltd in its first year, have encouraged more countries to join the pool which has in turn increased the diversification benefits of the risk pooling, providing a win-win for all stakeholders.”

ARC is targeting a total of 20 to 30 African countries to become Members over the next four years.

It is planning to offer tropical cyclone and flood risk within the next year and in the longer term, to set up a platform to issue parametric climate change catastrophe bonds. ARC also received a mandate to look into insuring African states against infectious disease outbreaks.

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