Insurance Against Disaster - Lessons Learned from the African Risk Capacity
G7 leaders endorsed the African Risk Capacity (ARC) as a model for climate insurance. The organisation works with countries to improve their preparedness for extreme weather events and disasters. In the interview, Ekhosuehi Iyahen, Director of Policy & Technical Services, shares new insights on innovative mechanisms to create climate-resilience, challenges on the way, and next steps.
Our questions were...
1.How would you describe the core vision and objective of ARC?
3.What role has the private sector played in the formation of ARC?
4.Potential members must complete contingency planning to participate. What does this involve?
5.What are the main risks to agricultural industries?
6.What methods and technologies does the ARC utilise to map risk and impact across Africa?
8.What plans do you have to launch other types of cover and products in the future?
11.How do you see the activities of ARC developing over the next five years?
13. Is ARC considering making the premium more affordable?
14.What can be learned from the first two years of using the insurance?
15.What role should InsuResilience play in the future?
[The interview is based on an interview conducted in July 2015 by the G7 Research Group and G20 Research Group. It was updated and expanded in March 2017 to reflect most recent developments.]
1.How would you describe the core vision and objective of ARC?
Ekhosuehi Iyahen: Currently, the main mechanism to respond to natural disasters relies on ad hoc funding, which is secured only after a disaster strikes. While the international community is working to raise funds to respond, the people who are affected by the crises are forced to make difficult decisions in order to cope, such as selling off livestock, removing their children from school and other negative coping mechanisms. Livelihoods are lost, assets are depleted, and development gains suffer major setbacks – forcing more people into chronic destitution and food insecurity in the world’s least developed countries.
ARC was established as a specialised agency of the African Union to help member states improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters, therefore protecting the food security of vulnerable populations.
The objective is to assist member states to reduce the risk of loss and damage caused by extreme weather events and natural disasters affecting Africa’s populations by providing targeted responses to disasters in a more timely, cost-effective, objective and transparent manner.
2.How is ARC structured?
Ekhosuehi Iyahen: ARC is comprised of two entities, the ARC Agency, a treaty-based international organisation and specialised agency of the African Union, which provides technical and capacity building services to its member states, and the ARC Insurance Company Limited, which is its financial affiliate established to provide insurance to participating sovereigns. ARC Ltd is a mutual insurance company owned by its members. While it is not motivated by profit, the company operates according to solvency standards. Net gains are reinvested back into the pool to grow the reserves for future years.
3.What role has the private sector played in the formation of ARC?
Ekhosuehi Iyahen: As an example, ARC Ltd retained Willis Group for reinsurance brokerage services following a competitive tender process. Willis placed a reinsurance portfolio ($55 million in excess of $15 million retention) for the company in 2014 – 2015 in its first year of operation. The reinsurance programme met with strong interest in the markets, with 11 major global reinsurance markets and Africa participating in the company reinsurance programme. For the 2015 – 2016 pool, these numbers again increased thereby demonstrating an ever increasing appetite of the market/private sector for the risk that ARC is bringing to the table.
Important to also mention that in September 2014, the Willis Group won the Reinsurance Transaction of the Year award at the Insurance Insider Honours for its work in designing and placing the reinsurance for ARC. The Insurance Insider Honours recognise outstanding achievements in broking, underwriting and claims.
4.Potential members must complete contingency planning to participate. What does this involve?
Ekhosuehi Iyahen: The process requires countries to identify the optimal use of funds from an ARC pay-out given the existing national risk-management structures and the needs of potential beneficiaries. Operations plans must be government-driven and based on in-country priorities for risk management in the context of food security. Contingency planning refers to both the operations plan and a final implementation plan that would be submitted by the national government shortly before an imminent pay-out, and would include detailed information on how the ARC pay-out would be deployed given the specific situation. These plans are developed collaboratively between national governments, in-country partners and, where needed, the ARC secretariat.
Based on a comprehensive study into the cost-saving benefits of early response, the ARC has developed contingency planning standards and guidelines that help countries to link early warning to livelihood-saving early response activities.
Member states must show that activities meet three sets of criteria:
- Time sensitive and/or catalytic – ARC Insurance Company Ltd pay-outs must be used for time-sensitive activities that would not be possible without ‘first available funds’, ideally implemented within 120 days of an ARC pay-out, and/or activities that prompt or enable other activities to ensure faster and more effective action for the overall response.
- Livelihood savings – ARC Insurance Company Ltd pay-outs should not be used for general investment activities, but instead should aim to protect livelihoods of beneficiaries who would be more negatively impacted if they need to wait to receive assistance.
- Duration – Each activity that will be funded by an ARC Insurance Company Ltd pay-out should be completed within six months to ensure that financial resources are utilised in a timely and efficient manner. This will make sure that countries capitalise on the ‘first available funds’ principle of ARC.
5.What are the main risks to agricultural industries?
Ekhosuehi Iyahen: Africa is widely recognised to be the region most vulnerable to weather risks. Weather-related disasters are already undermining record growth across the continent, threatening hard-won development gains and vulnerable populations. Increasing climate volatility will counteract investments being made by countries to mitigate, prepare for and manage current weather risks. The World Bank estimates an adaptation investment cost of $14-17 billion per year over the period 2010-50 for sub-Saharan countries is needed to adapt to an approximately 2°C warmer climate forecast for 2050. Climate change is particularly threatening to the future of African agriculture, which impacts global food security and the economic livelihoods of hundreds of millions of Africans.
6.What methods and technologies does the ARC utilise to map risk and impact across Africa?
Ekhosuehi Iyahen: The technical engine of ARC is a software product called Africa RiskView, which uses rainfall data to estimate the number of people affected by a drought event during a rainfall season and then the dollar amount necessary to respond to the affected people in a timely manner. Through the agency’s capacity-building programme, countries are able to model their historical drought response costs and select rainfall-based triggers to determine when they would receive a pay-out in the future, if they take out an insurance policy. We are working to add cyclone and flood risk to the model with these likely to be ready by 2017 and 2018 respectively.
7.How does the organisation assist member states in boosting preparedness for extreme weather events and natural disasters?
Ekhosuehi Iyahen: ARC helps its member states to manage risk, instead of the traditional way of managing disasters only after they strike. Member states receive risk-transfer training and other capacity-building services to ensure that operations plans are ready and approved by a technical working group and a peer review committee, prior to a disaster striking. This way, countries are ready and prepared for a disaster before it strikes, ensuring that early intervention activities can be rolled out right away.
8.In just three years of existence, ARC has made pay-outs totalling over US $34 million in drought insurance claims. What plans do you have to launch other types of cover and products in the future?
Ekhosuehi Iyahen: In addition to drought insurance, ARC is expanding to offer both tropical cyclone and flood insurance, which will be made available to member states in 2017 and 2018 respectively. ARC is also looking to launch what we refer to as Replica coverage in 2018.
Through Replica Coverage, UN Agencies and other humanitarian actors can leverage ARC’s country-built risk management architecture to scale up coverage and boost timely response capacity through purchasing Replica Coverage from ARC Ltd.
The goal is to extend the same coverage purchased by African Governments to these organisations in order to boost insurance coverage on the continent and to drive collaboration on contingency planning and response. This is timely for the humanitarian community which is also itself faced with serious financing constraints given global demand.
9.In 2015, ARC launched the research and development phase of its Extreme Climate Facility (XCF). How would you describe the structure and purpose of the facility?
Ekhosuehi Iyahen: The Extreme Climate Facility (XCF), which is still in the research and development phase, is designed to help ARC member states adapt to an increasingly volatile climate. The XCF will be a data-driven, multi-year vehicle that will provide financial support to eligible African countries to help them build climate resilience and be financially prepared to undertake greater adaptation measures, should extreme weather event frequency and intensity increase in their region. The XCF will be an African-led initiative that is designed to access private capital, diversifying the sources and increasing the amount of international funding available for climate adaptation in Africa.
ARC provides an ideal platform from which to develop and operationalise such a new facility. The XCF will use both public and private funds and facilitate direct access to climate adaptation finance for eligible African governments based on the demonstrated need for enhanced adaptation measures. Its financial obligations to African countries will be securitised and issued as a series of climate change catastrophe bonds. Once established, the bonds will provide additional climate change adaptation financing to participating AU countries, in the event that weather shocks, such as extreme heat, droughts, floods or cyclones increase in occurrence and intensity. The bonds will be financed by capital provided through private investors, with donors supporting the annual bond coupon payments. XCF will be structured so as to issue more than $1 billion in African climate change bonds over the next 30 years.
10.In February 2015, it was also announced that ARC would be developing insurance for disease outbreaks and epidemics. How is this initiative progressing?
Ekhosuehi Iyahen: The outbreak and epidemic (O&E) insurance product is currently also in the research and development phase, with a goal of insuring its first member states in 2018. While the basics of O&E are similar to ARC’s drought insurance, ARC will need to build a new parametric model for O&E to underpin the insurance contracts and work with countries to define the appropriate contingency plans for responding and hopefully containing an epidemic. The most challenging part will be building the underlying parametric model – this has never been done in Africa at the national level before. A lot of work is currently being undertaken in partnership with other African institutions such as the African Union Centre for Disease Control to think through some of these issues. Some interesting results are emerging.
11.How do you see the activities of ARC developing over the next five years?
Ekhosuehi Iyahen: One main focus will be on portfolio growth and adding new weather risks to ARC’s coverage options. In May 2014, ARC Ltd issued drought insurance policies totalling $129 million for a total premium cost of $17 million to a first group of African governments for five rainfall seasons – Kenya, Mauritania, Niger and Senegal – marking the launch of the inaugural ARC pool. This number increased for the 2015 – 2016 pool and we are seeing increasing demand from our countries. We have a target of up to 20 countries receiving coverage for drought, flood and cyclones totalling more than $600 million in the next five years.
However, in step with portfolio growth, ARC’s core focus will be on improving the national-level contingency planning and learning from each insurance pool and the implementation of pay-outs when they occur. At the end of the day, while timely funds are critical, ARC’s insurance instrument will only be as valuable as a county’s ability to convert an early pay-out into a rapid and effective response to those affected. For ARC to deliver on its promise to strengthen national capacities to manage and reduce risk defining the best practices for more effective and coordinated early interventions will be key and critical to building a more disaster-resilient Africa.
12.The premium cost is often a challenge for poor states. What are some of the challenges that governments face?
Ekhosuehi Iyahen: Despite the recognition of the value of the insurance offered by ARC there are real challenges we face in growing the pool. These include:
Fiscal Constraints – Premium payment is often not prioritised by governments who are facing, in some instances, unprecedented fiscal constraints. As a result of this, although there is recognition of the value of ARC insurance, governments have to make difficult trade-offs and are often unable to pay their premiums given other pressing needs. This means that in some instances although the demand exists, there is a challenge in actually capitalizing on what ARC offers. We are however working to address this issue.
Payment Fatigue – A sense of fatigue for countries to pay premium from their own resources when they have not received pay-outs in prior years is increasingly a concern. This speaks to the need to continue to work on the development of a culture and associated disciple required for efficient risk management. It is an issue which is exacerbated by the moral hazard that can sometimes be presented by the traditional humanitarian response system.
Political Instability – Civil unrest often leads to inaction and changes in government. For ARC, this results in a loss of momentum and a need to repeat key activities that would lead countries to an improved risk management system including financing through ARC insurance. In addition, elections have often disrupted the normal decision-making processes in government and can be a major challenge.
Shifting Priorities – ARC’s programme creates consensus around the importance of index-based weather insurance and the need for better disaster risk financing mechanisms. Consensus is built through working with policymakers and technicians. However, a change in decision makers results in policy changes and a shift in government priorities. A potential shift in a sovereign’s approach to building disaster resilience can reduce appetite for ARC products.
13.Is ARC considering making the premium more affordable?
Ekhosuehi Iyahen: Despite the challenges that I have mentioned above, ARC is taking concrete steps to support its members and address these issues. We have set out to reach 150 million people through $1.5bn in insurance coverage by 2020 by focusing on four key resource-dependent areas as follows:
Premium financing for Member States: Premium financing over a limited period for those countries that have operational capacity to use a pay-out but lack funding to pay premium will sustain pool growth in the early years and can be tied to commitments on embedding risk management in sovereign systems in the medium term. We are also considering premium financing potentially over the longer term, to allow high-risk countries with low resilience and/or highly limited fiscal space to join ARC.
Currently, no countries in the ARC pool are supported through external resources in their payment of ARC premium. Risk pools in other regions have received premium financing to ensure the engagement of those countries as premium is built in to the natural budgeting processes. There is a need to work with African governments through such a process to ensure that disaster risk financing is mainstreamed into government processes. We have been actively working on such a partnership with the African Development Bank (AFDB) on this issue and recently signed a memorandum of understanding with the ADB and ADF towards getting to this point.
I have also mentioned our effort to keep innovating and developing new products. ARC has also been actively working to ensure that the cost of the products offered to members is kept to an absolute minimum. This has been central in guiding our work to date with ARC products being several magnitudes cheaper than if countries were to approach the market independently for similar products.
Investment in ARC for staffing and to drive pool growth: In order to meet the targets identified, there is a need to scale up the activities of ARC to meet the demands of growing the pool to the identified target of 30 countries by 2020. One of the critical lessons we have learned from the implementation of ARC is that demand must also be actively cultivated alongside the development and provision of appropriate and relevant products. This does not happen automatically or overnight. It requires investment that is built on working with governments to meet their needs.
I have also shared information on the new products being offered by ARC such flood and tropical cyclone and replica coverage as well as Licensing for Development (L4D). The goal is to ensure that we have products which are responsive to the needs of our members and to find innovative ways to keep premium cost as low as possible.
14.What can be learned from the first two years of using the insurance?
Ekhosuehi Iyahen: There have been a lot of lessons learned from the implementation of ARC since its inception in 2012 as a Specialised Agency of the African Union, through to the launch of the ARC insurance Company Limited in 2014 and the 4 pay-outs to date.
My earlier response spoke to the challenges we have encountered in growing the pool but there are many lessons learned in other aspects of our work. In terms of the pay-outs, ARC has made pay-outs of US $34.4 million to 4 affected countries as a result of drought (Senegal, Niger, Mauritania and Malawi) in just 3 years. These pay-outs have gone towards assisting over 2.1 million people and 600,000 livestock. Activities implemented included targeted food distribution, subsidized cattle feed, conditional cash transfer and food procurement.
Important to note is that for all of our pay-outs, despite delays in some instances, overall, the countries managed to implement response activities and ensure beneficiaries received assistance in a timely manner, when compared to the status quo. This meant that the impacts of these drought events on beneficiaries were significantly reduced.
We also observed better coordination of response in the countries which received a pay-out with these governments being empowered to take a leadership position in defining the response process. This is in stark contrast to the usual scenario, where international partners often lead. This is of course an important lesson for us as an institution and one which is central to the change we want to see in our countries.
Another lesson which can perhaps be seen as more administrative was the recognition that transfer of off-budget funds is procedurally extremely difficult. Recognising this constraint with our member states has however allowed us to develop alternative mechanisms to assist our governments in ensuring the smooth flow of funds to identified implementing agencies to support faster response to disasters when they occur. This effort to understand the constraints faced by our governments and a willingness to develop solutions will be useful in ensuring that going forward any delays from the pay-out to the implementation phase are reduced to a minimum.
After all, one thing which is clear is that as an institution we need to continue to exhibit flexibility and efficiency in our engagement with our countries. We also need to ensure that innovation through continuous research and development stays at the heart of our work and that we respond to the actual needs of our countries. This will be reflected in the improvements we will make to Africa RiskView model as part of its ongoing iteration and working with our countries to improve their actual response implementation capacities through our contingency planning efforts. This also means working with various partners, who are equally engaged in this space to support the efforts of our member states.
15.What role should InsuResilience play in the future?
Ekhosuehi Iyahen: InsuResilience has a tremendous role to play going forward. This role involves not only maintaining the momentum and advocacy around the role of insurance in supporting resilience, but also actually supporting the scale up of mechanisms such as ARC, to ensure that the most vulnerable are indeed protected.
Coming out of COP 22 in Morocco and with Germany at the helm of the G20 this year, it is clear that there is the political will to move this forward, but we must all be proactive about ensuring that it delivers.
[The interview is based on an interview conducted in July 2015 by the G7 Research Group and G20 Research Group. It was updated and expanded in March 2017 to reflect most recent developments.]
Ekhosuehi Iyahen is the Director of the Policy & Technical Services Department at African Risk Capacity. She has more than 10 years of diverse experience in disaster risk management and financing, reinsurance, risk modelling and climate change adaption and mitigation.@ARCapacity
