The African Risk Capacity (ARC) is a sovereign risk pool and early response mechanism designed to provide insurance to countries in the event of a climate shock. ARC’s mission is to help members of the African Union to protect the food security of their vulnerable populations. As an insurance risk pool, ARC’s objective is to capitalize on the natural diversification of weather risk across Africa, allowing countries to manage their risk as a group in a financially efficient manner to respond to probable but uncertain risks. To participate in ARC, countries must undertake several processes, including customizing the Africa RiskView (ARV) software, signing MOUs for in-country capacity building, defining a contingency plan for ARC payouts, and determining risk transfer parameters. The payout occurs when the rainfall deviation crosses a certain pre-defined threshold estimated by the ARV software.
Stage of Implementation
ARC currently offers maximum coverage of USD 30 million per country per season for drought events that occur with a frequency of 1 in 5 years or less. 34 African Union member states are a part of ARC in 2020, 24 have active MOUs, 13 are Class A Members who have purchased the policy and 7 countries have received payouts. Since 2014, ARC Ltd has collected over USD 100 million in premiums, provided USD 720 million of insurance coverage, and paid a total of USD 65 million in payouts mainly in the agriculture sector that has finance efforts including scale-up on cash transfers and replenishment of strategic grain reserves in Malawi in 2017 and response to severe drought in Mauritania in 2018 and in Madagascar in 2020.
- Funders to ARC: UK FCDO (GBP 30 million) and KfW on behalf of BMZ (USD 48 million) have been members since ARC Ltd’s inception in 2014. Both are contributors of interest-free capital with a maximum fixed term of 20 years.
- ARC Agency: The ARC Agency is the capacity building, educational, and advocacy arm of the ARC Group that is responsible for communicating ARC’s mission and goals to Member States and the broader public. ARC Agency’s mandate is to bring African Union member states on board the insurance platform and to strengthen member states’ capacities around early warning, disaster risk management, and risk financing.
- ARC Limited: ARC Ltd is the financial affiliate of the ARC Agency and was established in Bermuda in 2014 as a Class-2 mutual insurance company. Since 2014, ARC Ltd has provided USD 720 million in insurance coverage for the protection to 72 million people and has paid out USD 65 million in claims to countries in need of drought relief.
- Availability of robust climate data: Customization of the Africa RiskView software is dependent on historical loss and damage information and different types of weather data disaggregated at the subnational level.
- Technical and financial capacity within the governments: Technical expertise in areas of sovereign and weather index insurance is required to take ownership of the ARC’s disaster risk financing mechanisms.
- High level of awareness for ARC: There needs to be high level of awareness of the ARC program among stakeholder, institutions, and political decision-makers in a potential member country to make participation in the pool viable.
24 countries have signed MOUs with ARC: Benin, Burkina Faso, Chad, Comoros, Côte d’Ivoire, Djibouti, The Gambia, Ghana, Guinea, Kenya, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Nigeria, Rwanda, Senegal, Sudan, Togo, Uganda, Zambia, and Zimbabwe. Of these 24 countries, Burkina Faso, Chad, Côte D’Ivoire, Kenya, Madagascar, Malawi, Mali, Mauritania, Niger, Senegal, The Gambia, Togo and Zimbabwe have each taken out at least one drought insurance policy since inception and Malawi, Zimbabwe, Côte d’Ivoire, Madagascar, Mauritania, Niger, and Senegal are payout recipients.