The encyclopedia · Finance & Accounting · Financial decision · 2014
Africa insures whole governments against drought with a satellite index
The African Risk Capacity pool pays a government automatically when a modelled drought index triggers, within days, not after a claims fight.
African Risk Capacity · Senegal · Niger · Mauritania
the move
After a drought, African governments often took months or years to raise and disperse relief, so the damage deepened while the money was still being argued about.
The African Risk Capacity, launched in May 2014, built a continent-wide sovereign parametric insurance pool owned by its members, with an insurance company at its centre.
Payouts are triggered by Africa RiskView, which models rainfall and its effect on crop yields; countries must complete a year-long customization and contingency-planning process and get a certificate of good standing before they can receive a payout. In 2015 ARC made its first payout, $25 million to Senegal, Niger and Mauritania after the 2014 drought, against combined premiums of about $17 million.
The design is as much about preparation as payout: the money arrives during or just after the season and goes out along a pre-approved plan, turning a disaster payment into a fast relief operation.
why it works
- A data-triggered payout is fast and objective, so it arrives before the crisis becomes a catastrophe.
- An index removes the long negotiation over how bad the drought really was.
- Requiring a contingency plan forces countries to decide in advance how they will spend the money.
- A pooled, pan-African structure shares risk and keeps premiums affordable for small states.
what transfers
If you can define the bad event, skip the argument over it.
what came after
ARC scaled its pooled membership beyond the original countries and began planning catastrophe bonds and a flood facility; its early drought payouts became the reference example for sovereign parametric risk financing and index-based humanitarian aid.
references
- African Risk Capacity in first payout of $25m to three countries
- New insurance scheme boosts Africa's battle against climate change
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