African countries turn to insurance to safeguard against climate change

Dr Ngozi Okonjo-Iweala

By Lars Thunell & Ngozi Okonjo-Iweala

When world leaders gather for critical climate negotiations in Paris later this year, they must not overlook the major injustice that means Africa – responsible for only a tiny proportion of global greenhouse gas emissions (pdf) – will suffer disproportionately from rising temperatures.

The most vulnerable populations with the least capacity to cope will shoulder the burden.

Across the continent, the agricultural sector still employs about 65% of the labour force, and most of the rural poor. The majority are dependent on rain-fed agriculture and rangeland, which are subject to the vagaries of the weather. So an increase in the frequency or severity of extreme weather events driven by climate change will result in increased risk of hunger and malnutrition in Africa’s most vulnerable populations.

At the moment, the system for responding to natural disasters is not as timely or equitable as it could be. Funding is secured on a largely ad hoc basis after disaster strikes: only then can relief be mobilised toward the people who need it most. In the meantime, lives are lost, assets are depleted and development gains reversed – forcing more people into chronic hunger, malnutrition and destitution. While developed countries use sophisticated risk-management systems, Africa relies on cost-ineffective charity for each disaster.

However, the continent is taking charge and breaking out of this cycle. We now have data about the adverse effects of weather shocks, the cost savings of well-timed responses, early warning technology, and basic social protection systems in many countries.

Together with modern financial tools, we are transferring the burden of climate risk away from governments – and the farmers and pastoralists they protect – to the international financial markets that can handle the risk much better.

In 2012, 26 African Union member countries came together to establish the African Risk Capacity (ARC) agency and its financial affiliate, a mutual insurer capitalised at $200m (£131m) by the UK and German governments with interest-free loans. With the $350m in insurance premiums paid by African member countries up to 2020, it provides members with rapid funds in the event of a natural disaster. We are already seeing results.

In September last year, as satellites detected a significant rainfall deficit in the Sahel, Senegal, Mauritania and Niger – three of the countries that formed ARC’s inaugural risk pool – were able to use ARC’s Africa RiskView software to determine the areas and communities that would be worst affected. Knowing that their insurance policies, for which the countries paid a combined premium of $8m, would probably pay out, they updated their drought contingency plans and prepared to assist vulnerable populations as soon as possible.

By the end of the west African agricultural season in January this year, ARC Insurance Company Ltd had paid out more than $26m, while a UN aid appeal was still being formulated. The money, used to buy livestock fodder and staples – primarily from local producers – benefited roughly 1.3 million people who might have otherwise been forced to cut down on meals, take children out of school or leave their land.

By 2020, the ARC aims to reach 30 countries with nearly $1.5bn of coverage against drought, flood and cyclones. The agency will indirectly insure 160 million Africans – almost half of the G7 global target of 400 million vulnerable people to be insured – and radically transform the way weather risks are managed across the continent by embedding disaster preparedness and financing in our African-owned sovereign risk-management systems.

The ARC also aims to provide the infrastructure to ensure these risk management investments are sustainable and resilient to future climate shifts. This will be achieved using climate adaptation financing, the extreme climate facility (XCF), which intends to issue climate change catastrophe bonds in 2017.

To do this, we are seeking the help of donors, such as the G7, to maximise the benefits of the premium payments from African governments.

The ARC is also using its expertise to extend the protection that global insurers and reinsurers can offer Africa. The industry is increasingly focused on disaster risk, anticipating more frequent and severe losses over the coming decades.

At the end of September, the ARC and its partner Willis unveiled plans to license Africa RiskView software to support agricultural development at scale on the continent. This will not only protect investments in the sector, but also provide an additional revenue stream to ensure the ARC’s long-term financial viability.

We have the opportunity to “leapfrog” carbon-intensive phases of development to cleaner, greener, more advanced land-use solutions. Yet climate change threatens both our pace of progress and the assets we have accumulated over the past decades of growth.

The ARC goes a long way towards ensuring the availability of adequate financial resources, which are critical for development progress in Africa. We are ready to face the challenges of climate change adaptation head on, and with our partners are looking forward to moving from managing crises to cost-effective risk management.

*Dr. Ngozi Okonjo-Iweala​ currently chairs the Governing Board of African Risk Capacity

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