When Disaster Strikes: An Innovative Approach to Insuring Against Climate Risks in Africa

At the April 20th  Adaptation Community Meeting, Erica Hovani and Ekhosuehi Iyahen from African Risk Capacity (ARC) tackled the complex but increasingly important topic of insuring countries against climate risks.

Extreme weather events such as droughts and floods are becoming more frequent and severe. This increased weather variability has many impacts, including driving up insurance premiums and threatening economic growth. This is particularly true in Africa where exposure to droughts and floods is high, but the capacity to respond to such events is low, often requiring international assistance.

While insurance payouts could help countries respond, high premiums are cost-prohibitive to most African countries. At the same time, countries often lack the technical capacity, political will, interagency coordination or financial resources to integrate resilience and adaptation programming into their long-term development plans as a buffer against future risks.

To address these challenges, the African Union established ARC as a Specialized Agency of the African Union. ARC helps the 32 member states improve their capacities to prepare for and respond to extreme weather events and natural disasters, thereby ensuring food security for vulnerable populations.

ARC, through a financial affiliate, is managing an insurance risk pool in which member states can participate by paying premiums out of national budgets. ARC then disburses payouts when certain weather thresholds are crossed –for example, when rainfall and temperature data indicate a drought. Countries can use this payout to fund immediate responses. Currently, ARC has only a drought insurance product, but is developing one for floods and tropical cyclones.
 

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Figure 1 - Savings from early intervention – this figure shows the different responses by households (a), the international community (b) and ARC (c). ARC can issue payouts 10-15 days post-harvest.

Compared to traditional humanitarian assistance, ARC payouts are much quicker and tied to contingency plans that the countries have already developed as part of their initial participation in the insurance plan (see Figure 1). This means that countries spend funds to reduce the impacts of a drought at the outset, rather than respond later to wide-scale damage.

Early intervention can also reduce negative coping mechanisms (such as selling assets or reducing food intake) that households often turn to in times of drought. During the 2014-2015 drought in the Sahel, an appeal for international aid was launched in mid-February 2015. Meanwhile, ARC had already made payouts to Niger, Senegal and Mauritania the month before.

Ms. Hovani and Ms. Iyahen explained how ARC is also developing a separate mechanism, the Extreme Climate Facility that would allow for a streamlined delivery of adaptation funds linked to climate risks. Supported by international donors, rather than self-funded like the insurance premiums, this mechanism would help countries actively trying to manage climate risks, as well as allow interested donors to invest in evidence-based climate change adaptation to deliver funds.

Ms. Hovani and Ms. Iyahen acknowledged the challenges inherent in ARC’s products. For example, countries that have been paying into the insurance pool for years and have not yet seen a payout are beginning to wonder if risk protection is worth the added cost to their annual national budgets. Disbursements are also at risk of being held up in slow or inefficient government processes, highlighting the important role of monitoring and capacity building.

For the Extreme Climate Facility, a donor-funded initiative, a key question is what happens if donor priorities shift and funding dries up? Although there are no easy answers, it is evident that ARC’s experiences to date and plans for the future are helping countries protect their most vulnerable populations against climate and weather risks.