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Frequent natural disasters spurs Africa to create its first centralised insurance-pool.

Author: Progress Mwareya Date Published: 2017-04-28 16:18:21
  • Frequent natural disasters spurs Africa to create its first central insurance-pool.
     

    Whenever floods, mudslides, famine and other calamities descend upon communities in Africa, relief aid takes ages to reach ravaged villages, counties or islands. Delays amplifies deaths, disease and malnutrition. For instance, during mudslides, bridges vanish; women sell their cattle for a pittance and families disperse into refugee camps where hunger flourishes. A quicker response in disaster times saves lives and boosts preparedness.

    To improve the misfortune of “slow disaster response” civil society, government and corporate insurers are talking of “resilience building.” This means “forward planning” in peaceful times to make communities withstand future floods, famines or crop failure.

    “Our focus should be to move from disaster response and shift our energies to being proactive,” says Dolika Banda, a Zambian economist who has been named Chief Executive Officer of African Risk Capacity (ARC ltd).

    “The continent needs to move from an ex post humanitarian response to ex ante preparation and disaster management,” says Ms. Banda.

    Her company ARC Ltd is the private-sector arm of the ARC Agency, established as a special agency of the African Union (AU) to help Member States improve their capacity to plan and respond to extreme weather events and natural disasters, thereby protecting the food security of their vulnerable populations, according to their website. A treaty in 2012 gave birth to ARC Agency. 32 African countries signed it into existence and it has joined the growing club of “risk pooling” agencies around the world. (Other notable ones are Caribbean Catastrophe Risk Insurance Facility).  

    ARC works like vintage insurance, says Ms. Banda. “Think of garage owners who must install smoke detectors to safeguard against a blaze,” she says. If detectors malfunction, the whole garage collapses into a pile of ashes.

    “As a technician, my message is that we cannot depend on nature,” said Hastings Ngoma, the government coordinator for ARC Malawi.

    ARC works to instill the value of insurance coverage to national leaders across Africa. “Before countries buy coverage we persuade them to develop contingent plans,” Ms. Banda says. This improves preparedness and countries know what benefits they accrue before they pay premiums.

    ARC uses a straightforward, novel system called parametric insurance to determine payouts. Under the parametric insurance policies, payouts are made where a predetermined threshold is reached – for instance, if rain falls below a certain level.

    Customized policies:

    “You need to reach the trigger,” says Ms. Banda. ARC Ltd and countries have to jointly develop customized policies that assure a payout when one is needed, she added.

    The organization´s original capital infusion was a loan. Opening shop in 2014 with drought coverage, ARC marked its inaugural period with $26 million in payouts to Mauritania, Niger and Senegal. More recently, Malawi has qualified for $8 million in cash.

    The ARC Ltd brain trust has calculated that a dollar in premiums translates into at least five dollars´ worth of traditional response – with quicker delivery. ARC Ltd aims to cut down its current payout response time of six weeks, but even six weeks outpaces the United Nations´ response in providing relief supplies for the Sahel.

    Eight countries including Kenya, Malawi and Zimbabwe, have taken drought insurance in ARC´s first three years of operation. Total coverage in the second year for seven nations was $US178 million. Six countries (Burkina Faso, the Gambia, Mali, Mauritania, Niger and

    Senegal) are currently on board for the annual period that runs through mid-2017.ARC emerged partly in response to concerns about the often delayed and high cost of response of the UN´s World Food Programme and donor countries when providing humanitarian relief. The Germany development bank KfW and UK aid agency, the department for international development, laid $US200 million interest-free, 20 year loan as seed capital.

    Donor and WFP support for ARC is expected to continue. During the COP21 climate summit in December 2015, ARC announced more than $US150 million in new pledges from countries including Canada, France, Germany, United Kingdom and the United States.

    Last year, the WFP announced collaboration with ARC to extend disaster insurance coverage to more African countries, partly thanks to European donors. The WFP`s replica insurance program will match outlays for countries that consistently invest in insurance premiums via ARC. The UN agency hopes that by 2030 insurance will finance half its natural disaster aid expenditures in Africa and Asia.

    “WFP is transforming the way we assist vulnerable communities to cope with natural disasters, from disaster response to risk management,” said WFP executive director Ertharin Cousin during the World Humanitarian Summit in Istanbul last year. “Countries themselves need to own and manage their disaster risk, first and foremost.”

    To make sure that it can make good on any and all claims, ARC has its own insurance, spreading its risk among many of the world´s top reinsurance companies, including such big names as Munich RE.

    Reinsurance companies,

    The number of reinsures that back ARC´s portfolio stands at 24, twice the number that signed at the beginning in 2014. “They need us more than we needed them,” says Simon Young, former head of ARC, Ms. Banda´s predecessor. Mr. Young remains in an advisory capacity.

    Big insurers have been trying to tap the African market for years, without much success. “ARC is a really nice vehicle for them to get a lot of risk in a nicely packaged way,” says Mr. Young.

    Using this leverage, ARC Ltd can negotiate favorable prices, Mr. Young noted. The appetite among reinsurers is sufficient to cover ARC Ltd´s needs “many times over”, observes an insurance insider who preferred to remain anonymous.

    ARC Ltd hopes to provide $US1, 5 billion of coverage to for 150 million people against drought, floods, cyclones, in 30 countries by 2020. Sixteen countries have signed memorandums of understanding, a key step forward to obtaining coverage.

    Cyclone and flood programs are in research and development, a process that includes number crunching make sure that necessary parameters and triggers are fairly calculated and correctly measured.

    Indian Ocean countries such as Madagascar have expressed interest in cyclone coverage, notes Ms. Banda. It is due to be rolled out later this year. Several donors appear ready to launch the flood scheme.

    To ensure that payouts are used for disaster mitigation purposes, ARC Ltd plans to establish parameters for aid distribution and a monitoring system. “We need a foolproof methodology for the traceability of payouts,” says Ms. Banda. Her goal, she says, is to make African governments feel the initiative is theirs.

    Beyond its current droughts coverage, ARC Ltd could be well placed for expansion. But in an era of ever-tightening, national leaders need to convince taxpayers of the value of shelling out premiums.

    The lack of deeply-rooted insurance markets also seem to present a barrier to many African countries. Of all premiums in sub Saharan Africa, 80% concentrated in South Africa. “Insurance is relatively a new sector,” says Mr. Ngoma. “We don’t have a culture of insurance.”

    However, South Africa´s dominance is set to be challenged by new players. Nigeria tops the list with Kenya and Ethiopia showing an impressive growth in insurance markets.

    “This is something governments never considered paying for before,” according to Mr. Young.

    Malawi was among the first countries to sign on, partly due to its experience with a World Bank pilot programme for drought insurance in 2008 – 11, noted Mr. Ngoma. “Our current minister of finance is an economist. He understands the advantages.”

    The prime pump for yet convinced, international donors and institutions such as the Africa Development Bank may be willing to subsidize premiums for a while, Ms. Banda notes, while cautioning the need to reduce the role of outsiders. “The original concept behind ARC was that over time it would be mutually owned by the sovereigns of Africa.”

    Photo Caption (Photo shows soilders and releif workers sifting through the catastrophic mudlslides in Sierra Leonne in 2017)

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