Liz Booth explores the first annual report from Africa Risk Capacity, which finds innovative solutions to risks in the emerging markets
In many emerging markets, insurance paves the way out of poverty and enables people to pick themselves back up after disaster strikes. So, innovation in insurance can genuinely be a life-and-death matter.
Across Africa in particular, insurance penetration rates are low – often 1% or 2% of GDP – while even ‘established’ markets like Kenya can only boast an insurance penetration level of 3%.
So, when disaster does strike – often in the guise of a flood, a typhoon, or a drought – too many people are left uninsured.
Back in 2012, there was an innovation – Africa Risk Capacity (ARC), a financial affiliate of the Specialised Agency of the African Union (ARC Agency), operating across the African continent and providing an index-based weather risk insurance pool and early response mechanisms.
Today, it provides ex ante solutions to improve current responses to drought, food security emergencies and other natural catastrophes across the continent, while building capacity within African Union member states to manage catastrophe risks by directly linking funds to pre-defined contingency plans.
$1 spent on early interventions from ARC saves $2 after a crisis
By 2020, ARC was led by 34 African Union member states and had a BBB+ Fitch rating, as well as one of the largest balance sheets dedicated to weather-related risks in Africa. In its first annual report, Lesley Ndlovu, CEO of ARC, explains: “Since its inception, ARC has improved its member states’ sophistication and understanding of risks and developed bespoke solutions to transfer the risk to global reinsurance markets.”
In the Covid-19 context, he says: “The adage by Tulley that ‘persistence and resilience only come from having been given the chance to work through difficult problems’ resonated with ARC in 2020. Covid-19 has tested our resilience and adaption to the changing environment. While we remain resolute that the challenges we are facing are surmountable in the long term, the immediate impact has been significant.
“Amid enormous uncertainty, we have been reminded of the increasing relevance of planning and preparedness to buffer the impact of disasters such as the coronavirus pandemic,” says Mr Ndlovu.
The ARC model aims to provide rapid response funding for natural disasters, whereas traditional disaster relief efforts provide funding once the disaster has proven to be damaging, at which point lives and livelihoods are already lost, assets depleted to the detriment of development gains previously made.
The model also has the advantages of a risk-pooling facility as an early response mechanism. Preliminary studies indicate that disaster risk that is pooled among nations and managed as a group, rather than borne by each country individually, can see a reduction of up to 50% in the emergency contingency funds needed on the continent.
ARC also provides leadership on disaster management and transfers this knowledge through training on contingency planning, risk modelling and access to technology. This knowledge is primarily shared through the capacity-building programme.
Country-specific contingency plans are created in partnership with MoU countries to prepare for extreme weather events before they occur. The scheme also works closely with countries to explore existing contingency funding mechanisms and scales up existing social protection programmes.
Contingency plans investigate a country’s drought profile (present-day and historical data), address institutional arrangements including those in place and arrangements needed, define risk transfer parameters, as well as modelling scenarios and effective interventions.
The programme also provides support for governments to make an informed decision on natural disaster risk transfer to ARC and take part in the pool, while ensuring coverage through ARC’s risk pools for efficient transfer to international reinsurance markets.
Mr Ndlovu says: “This year has forced us to dig deep and treat the challenges as opportunities to reposition our business and to co-create solutions with our member states, to proof the future against the increased threat of food insecurity on our vulnerable populations.”
Looking ahead to the next five years, Mr Ndlovu stresses that ARC’s new strategy of inclusive growth will build on past successes and will enable it to better meet the needs of Africans, through an expanded product range and a broader client base.
He believes ARC can “leverage the invaluable experience we have gained through providing drought insurance cover to expand the perils that we insure to include tropical cyclones and floods”, adding: “This expanded product offering provides more holistic protection to Africans, helps to close the protection gap and to build resilience in communities.”
Another major change going forward will be that, historically, ARC only insured national governments, but from this year it includes subnational governments such as states, province and small to medium-scale farmers, through aggregators.
“Broadening the client base will enable us to reach more people and significantly increase the level of insurance coverage on the continent,” says Mr Ndlovu with confidence.
Image credit | Shutterstock
The model aims to cover 150 million Africans by 2025. Its plans include:
Market penetration: Increase the current customer-base participation and mitigate the loss of market share to existing and new competitors by increasing sovereign buy-in of existing products with sovereign stakeholders.
Product development: Develop and rolling out new sovereign insurance products, including in areas such as pastoral drought, tropical cyclones, floods, outbreaks and epidemics.
Diversification: Expand business activities to include reinsurance by providing access to smallholder farmers at scale through the agriculture value chain, so that stakeholders are aggregators, insurers and reinsurers.
Market growth: Expand into new market segments, including:
- Micro/meso direct insurance – direct insurance to stakeholders in the agricultural chain, with value-chain stakeholders
- Supranational policies with stakeholders being regional institutions
- National agricultural insurance schemes and calling up of safety net programmes.