After Cyclone Idai hit in 2019, the Swiss Re Institute reported that the overall economic loss for Mozambique, Malawi and Zimbabwe was around $2bn, of which only 7% was covered by insurance – leaving a shocking 93% protection gap.
As Lesley Ndlovu, CEO of Africa Risk Capacity (ARC) Ltd, said in a new report from ARC: “This compares with an expected 25% rate of uninsured losses after Hurricane Ian hit the US recently.”
However, he also stressed that work to plug the uninsured gap is under way across east Africa. In November 2020, ARC Ltd. launched its new insurance product, the tropical cyclone (TC) parametric insurance mechanism. The first of its kind in Africa, the TC insurance policy provides rapid financing, facilitating early response to countries affected by tropical cyclones.
Mr Ndlovu said: “Madagascar became the first country in the region to take out the ARC Ltd. TC parametric insurance coverage, thanks to premium support from German banking group KfW for the 2020-2021 season.”
He explained that ARC Ltd.’s TC model covers the hazards of wind, storm surge and wave damages, while the effect of excess rainfall associated with cyclones will be covered under another ARC Ltd. insurance product dedicated to flooding.
The TC model is based on a stochastic database generated from historical events through 1,500 years, using storm tracks and intensity produced by the US Joint Typhoon Warning Centre for the period 1983-2013.
The model combines characteristics of cyclone event hazards with exposure and vulnerability data to model the population affected and the economic losses.
“Using an insurance model and specific contract terms, exposure loss estimates are translated into loss estimates for a portfolio of assets. Payout begins at the trigger level set by the policyholder, called the attachment point,” added Mr Ndlovu.
The ARC Ltd. TC model, which is encapsulated into the Africa RiskView Tropical Cyclone Explorer (TCE) software, was used to monitor Cyclones Chalane and Eloise, which hit Madagascar and Mozambique in December 2020 and January 2021 respectively.
“ARC Ltd.’s parametric triggers are designed for rapid deployment. The policy enables a swift response that reduces the cost to lives and livelihoods as it reaches those who need the support most urgently,” explained Mr Ndlovu.
“Unlike traditional insurance policies, intended to return the insured back into the position they were in prior to an insured event, parametric insurance covers the probability of a predefined event happening instead of indemnifying actual loss incurred.”
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