African Risk Capacity expects parametric drought insurance to trigger for four countries

According to the African Risk Capacity (ARC), a provider of parametric disaster insurance products to countries and other entities in Africa, the ongoing severe drought across the southern African region is expected to trigger its parametric insurance policies for at least four countries.

The southern African region is facing one of its worst droughts in decades, with millions experiencing extreme food insecurity and water shortages as a result.

African Risk Capacity sees the drought as both evidence of climate change and also exacerbated by El Niño, a weather pattern that can result in higher temperatures and lower rainfall across southern Africa.

In Southern Africa, approximately 20 million people are now facing crisis levels of acute hunger because of the El Niño-induced drought, ARC said.

African Risk Capacity (ARC) Group Director General, Ibrahima Cheick Diong said, “Once again, we are seeing the impact of extreme weather events on the lives and livelihoods of the most vulnerable, and we have to do all that is in our power to cushion this impact. Our hearts go out to the affected governments and their people as they work to comprehend the true extend of this disaster. Drought conditions are widespread across the southern African region and communities are facing extreme hunger, limited water supply and malnutrition, not to mention the loss of income from their agricultural activities.”

Prior to the start of the 2023/2024 agricultural season, the African countries Malawi, Mozambique, Zambia and Zimbabwe all entered into parametric drought insurance policies with ARC Ltd., the insurance affiliate of African Risk Capacity.

All four of these countries have been severely affected by the current and ongoing drought crisis, but by making the critical decision to participate in ARC risk pools for drought cover they have some financial protection in place.

ARC said that, “Based on early projections from ARC’s season monitoring tools, all four countries are likely to receive insurance payouts, and this will be confirmed at the end of the season.”

The parametric triggers used and risk pooling techniques that make use of risk and reinsurance capital more efficient, make the coverage more accessible to African countries and also ensure rapid payouts can be made.

Menghestab Haile, World Food Programme RD said, “The drought is hitting at a time of significant protracted unmet needs, with alarming food insecurity and malnutrition levels, and funding shortages that have stalled humanitarian activities. The drought has decimated livelihoods across southern Africa. The El Niño weather phenomenon serves as a poignant reminder of the climate crisis – and how urgent it is to scale up investment in activities that build resilience. Communities must be empowered with climate adaptation skills that will enable them to mitigate, reduce, and absorb the effects of climate shocks.”

As well as the four country payouts that are anticipated, there is also replica coverage in place, where organisations piggy-back on the parametric insurance to provide coverage across the NGO and other programs they operate.

ARC said that it expects, “Replica partners for the four countries: World Food Programme, StartNetwork and UN Refugee Agency (UNHCR) are also likely to receive a payout.”

“This is a region we have assisted with significant drought payouts in the past. In 2022, we paid out to $14.2 million to Malawi’s Replica partner, the World Food Programme; $5.3 million to Zambia and $1,4 million to Zimbabwe,” explained Lesley Ndlovu, CEO of ARC Limited.  “The impact of disaster events goes beyond the immediate socio-economic costs and in the absence of instruments such as ARC, disaster such as drought can easily trap vulnerable populations into perpetual cycles of poverty. It is our honour work closely with the four countries’ Disaster Risk Management structures and contribute to their resilience building efforts. It is moments like these when we can demonstrate the true impact of our work.”

In its first decade of operations, the African Risk Capacity (ARC) had paid out more than $170 million in claims to support its members in the aftermath of natural disasters.

It’s worth also noting that capital is flowing to countries affected by this severe African drought from other sources as well, including from the World Bank.

The World Bank is providing Malawi a quick-release of $57.6 million in financing to provide the country immediate liquidity through the Catastrophe Deferred Drawdown Option (CAT-DDO) structure that is in-force.