In the past ten years, ARC has covered more than 100 million Africans against natural disasters and paid, in timely manner, more than $125m in claims to its member states. However great this achievement may be, there are three main drivers to why countries remain exposed to disasters.
- First, not all countries are facing the same level of risk. This is expressed by different rates of hazard, exposure and vulnerability, which may require more or less funds to finance premiums. These levels of risk are also continuously changing especially considering climate change (hazard), high population growth (exposure) and other external factors such as conflicts or the Covid-19 pandemic (vulnerability).
- Second, governments may not have sufficient funds to pay for total coverage. The great proposition of insurance is to leverage the value of $1 invested in premium into up to $10 in coverage. Although this allows member states to transfer the risk of millions of US dollars of response cost to ARC Ltd, it is often not enough to cover the whole exposure of countries which can reach $1bn in some countries. Covering all the risk would require annual insurance premiums between $10m and $20m – far above the affordability line despite premium financing support from donors.
- Finally, insurance intrinsically embeds the notion of excess, or attachment point, which means that governments will always need to manage a certain level of risk retention before their insurance policy triggers. In theory, retention levels represent frequent events with low severity, manageable using national contingency funds and reserves, but in most cases, low on paper is already too high in practice.
For all the reasons above, ARC and other development partners involved in the space of disaster risk management and financing (DRM/F) have advocated to governments that insurance should not be considered as a panacea solution and must be completed by an optimal mix of financial instruments, each tailored to address layers of risk where they add the most value. These instruments may include reserves, contingency credit and funds, insurance and other derivatives such as cat bonds.
The mandate of ARC is to advise and support governments in developing a DRM/F strategy and creating a portfolio of financial instruments that will best address the risk they face.
ARC provides “macro” insurance to the governments, which is coverage at the national level. The insurance coverage taken by the government is usually supplemented by a Replica policy taken out by the humanitarian agencies operating in the country, such as the World Food Program. However, this coverage is seldom adequate to cover the entire population that needs insurance. As part of the national DRM/F strategy, we suggest governments must share their financial burden of residual risk with local insurance companies who are well positioned to manage it. This is done through the development of market-based solutions of micro and meso insurance.
Multiplying the effects of insurance
Another fundamental rationale for the development of climate micro and meso insurance is found in the many outputs and impacts. These products are complementary because they address the same risk but different needs in the country.
Macro policies taken up by governments and Replica partners with ARC Ltd offer quick liquidity in the event of an insured natural disaster. The main objectives are to avoid any fiscal shocks caused by disasters and bring additional funds to the governments to deploy rapid response operations. The goal of this type of product is to guarantee food security and/or access to public and basic infrastructures in the case of severe events.
Meso products are insurance policies in which the beneficiaries’ interests are represented by an intermediary aggregating third party (for example, NGOs, financial institutions, producers’ associations, agribusinesses or government agencies). This type of product is a quick way to reach out to many beneficiaries without logistical and commercial inconvenience. Meso insurance improves the resilience of value chains and paves the way for commercial growth.
Micro products are designed to insure producers’ assets and income protection leading to the resilience of individual smallholding households.
ARC is driven by mandate
ARC has the political mandate from the African Union to assist member states to improve the resilience of their populations in the face of climate change.
Our meso insurance programmes are aimed to be participative to build the required technical capacity across the insurance value chain and enable local insurers to develop, differentiate and market micro insurance products. As such, we can break down some of the local barriers to entry and catalyse the development of microinsurance solutions.
We have to work with regulators and government agencies to enable a favourable environment for the creation of innovative solutions and the protection of policyholders’ interests.
ARC Ltd offers reinsurance capacity to local insurers. As a mutual company, our reinsurance profit is then reinvested into further development of insurance in Africa in a sustainable way.
Insurance is a risk transfer mechanism that can be leveraged for social good and, if practised correctly, will ensure a better quality of life for all Africans. The best way to improve the penetration of meso and micro insurance solutions across the continent is for all role players to champion the cause.
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