Introduction to the African Risk Capacity

OECD meeting 20-21 April Paris, France

What is the African Risk Capacity?

An innovative extreme weather insurance mechanism designed to help African Union member states resist and recover from the ravages of natural disasters.

An African-owned insurance pool and early response mechanism that aims to catalyse a transition from the traditional ad hoc, ex-post disaster response system to a more efficient continental risk management system.

ARC offered coverage for droughts in early 2014. Three countries received payout in early 2015. It is developing a flood model for use in 2016.

A new way for African governments to improve food security among vulnerable populations.

Value Driver 1: Protecting Livelihoods and Development Gains

Cost-effective contingency funding protects livelihoods and development gains

Value Driver 2: Pan-African Political Solidarity Makes Financial Sense

Institutional Structure

ARC has two parts: • ARC Agency, a Specialized Agency of the African Union created by treaty • ARC Insurance Company Ltd, an insurance company created by the Agency and

organized under national law

WFP Support

ARC Agency Specialized Agency of the African Union

• Managed by Member States • Provides Guidelines & Oversight • Political Engagement • Capacity Building • Operational Monitoring

ARC Insurance Company Ltd. Regulated commercial insurance company

• Owned by member states and capital contributors • Risk pooling / insurance / asset management functions • Transfers risk to the markets • Established in Bermuda for the interim period

Quantifying the Risk

Hazard Satellite-based rainfall data for over 261,000 satellite pixels over Africa (0.1 dg x 0.1 dg or 10x10km sq. near the equator) updated every 10 days.

Vulnerability Who’s at risk? Where are they? What are they growing or where do their herds graze?

Exposure In today’s procurement and logistic costs, how much will it cost to assist each potential person affected?

Africa RiskView: Technical Engine of ARC

Africa RiskView is a tool that allows countries to: • Analyze and monitor their drought-related food security risk • Define their participation in ARC using transparent criteria • Monitor potential ARC payouts

By bringing together existing information on vulnerable populations with drought and crop early warning products, ARV defines a standard setting methodology that allows countries to identify and quantify drought risk and to transfer a portion of this drought risk to ARC

All model settings in ARV can be customized for each country and to reflect national risk transfer decisions

Long-Term Impact

Risk management and investment increase resilience and growth

• ARC complements and reduces reliance on external appeals • Investment raises productivity and increases resilience to withstand 1:10-1:15 year

events • ARC crowds in commercial insurance as higher resilience makes it attractive

Thanks

Website: www.africanriskcapacity.org

Papa Zoumana Diarra Chief of Contingency Planning Email: papazoumana.diarra@africanriskcapacity.org

Twitter : @ARCapacity

Back Up slides

ARC Value Multiplier for Member States

Two value drivers make ARC an efficient tool to manage droughts and other risks: • Improved risk management through risk transfer and risk pooling • Early response actions and improved targeting

Financial benefit of insurance through ARC:

• Low operating costs for the ARC, thus lower premiums for countries

• Capitalises on natural diversification in Africa • Better conditions on insurance markets • Focusing on more extreme coverage

> 1-in-5 year events better value

Estimated cost benefit for every US$ 1 spent on ARC versus traditional emergency response:

US$ 4.41 + possible direct cost savings

Development benefit of planning and early response:

• Protect lives and livelihoods • Protect development gains • Maintain economic growth • Scaling up social safety nets and contingent

transfers most effective

Enables

1 ARC Cost Benefit Analysis, IFPRI, Oxford University and Boston Consulting Group

• Natural disasters strike with a variability in magnitude High impact events happen less frequently Low impact events happen more often

Risk Transfer

0 5 10 15 20 25 30 Impact (e.g. in million US$)

Prob

abili

ty

35 40 45

Low impact High probability

High impact Low probability

Ranked by magnitude

You can see that on Risk Profile charts produced by ARV:

Each country/season has a different profile – which also largely depends on the customisation!

Amount of Risk

These Risk Profile charts also allow us to quantify the amount of risk there is in a country. Small but frequent, or rare but big all droughts are taken into account.

Average: USD 140 million

per year

Average: USD 26 million per

year

Niger Senegal

Now the questions are: • How much risk does the country want to transfer? • Which part of the risk?

Average: USD 9.6 million per year

Namibia

ARC and Loss and Damage

Complements investments in resilience by scaling up social protection systems and preventing asset depletion.

Strengthens vulnerability mapping, data sharing, and risk quantification efforts.

Is an operational regional mechanism with support across the continent.

Provides capacity building services to governments in risk management and contingency planning.

Ensures timely, reliable support to governments in the wake of an extreme weather event through a transparent financial mechanism.