African Risk Capacity Research Articles

Insurance and the contradictions of the climate-development-finance nexus: The case of the African Risk Capacity

This article considers recent efforts at extending the scope of green finance into insurance schemes to manage the losses associated with the climate crisis in vulnerable countries. Focusing on the case of the African Risk Capacity (ARC), the article argues that these efforts are particularly revealing of the contradictions of what we term the ‘climate-development-finance nexus’ – growing efforts to bridge climate and development activities, with an emphasis on mobilizing green finance in order to do so. In particular, the case of ARC shows how the promotion of insurance should be read as a set of ultimately failed efforts to navigate relations of international financial subordination. Approaching the ARC in this way helps us to understand why the latter has fallen into a shape at odds with the intentions of either member states or the donors who have supported it, the latter illustrated primarily by considering the role of the British Department for International Development. This case, then, is revealing of how green finance more generally is strongly shaped by statecraft within the constraints of existing patterns of financial subordination.

Mitigating proximate impacts of tropical cyclone landfalls in the Southwest Indian Ocean

The occurrence and impacts of tropical cyclones in the Southwest (SW) Indian Ocean were investigated over five cyclone seasons (November to April) between 2018/19 and 2022/23. Data describing cyclone characteristics, affected populations and economic losses from cyclone landfalls in Madagascar and Mozambique were extracted from the African Risk Capacity (ARC)’s Tropical Cyclone Explorer (TCE) software. Of 56 cyclones that formed in the region, 27 landfalls occurred with an average of 2.8 per season in Madagascar and 2.6 in Mozambique, mainly in January and February of each year. Most cyclone landfalls in Madagascar were categorized as moderate tropical storms (MTS, 43 %) and intense tropical cyclones (ITC, 22 %). In Mozambique, landfalls were mostly ITC (31 %) followed by MTS (23 %). Landfalls of very intense tropical cyclones (VITC) were more common in Mozambique (15 %) than Madagascar (7 %). An average of 1.8 million and 775,000 people per season were exposed to strong cyclone winds in Madagascar and Mozambique, respectively, with economic losses from cyclones per season averaging $544 million in Madagascar and $170 million in Mozambique. The African Risk Capacity (ARC), a specialized agency of the African Union, has implemented a parametric insurance solution to mitigate the proximate effects of cyclones damage on vulnerable populations. Four modules to estimate losses caused by cyclone events are described; the hazard-, vulnerability / damage-, - exposure- and insurance modules. Initial outcomes of the ARC’s parametric cyclone insurance policy in Madagascar and Mozambique are discussed. Since its launch in 2020, the ARC’s parametric cyclone insurance policy including its Replica partner allocated a total payout of $12.2 million to Madagascar following the landfalls of cyclones BATSIRAI in 2022 and FREDDY in 2023.

Efficiency of region-wide catastrophic weather risk pools: Implications for African Risk Capacity insurance program

In an attempt to better manage extreme weather risk using (re)insurance and securitizing devices, the African Union recently established the Africa Risk Capacity (ARC) to pool extreme drought risk across Africa. We investigate the prevalence of systemic risk within potential ARC risk pools and its effect on diversifying drought risk using rainfall index-insurance. To develop an index that captures the tail behavior of losses, we employ a two-stage process that involves a vector autoregressive model and nested Archimedean copulas. Finally, using the loss distributions, we derive and compare buffer load and pooling effects across risk pools. Overall, we find strong benefits in pooling drought risk in Africa. However, the benefits are highly heterogeneous across risk pools, some of which are very inefficient. The heterogeneity was found to be driven by non-linear dependence among losses that tends to be stronger in the tails of the distribution.

Sovereign insurance to incentivize the shift from disaster response to adaptation to climate change – African Risk Capacity's Extreme Climate Facility

In order to meet the costs of adaptation, additional funds will be required, including private finance. Sovereign insurance is currently used as a contingency for disaster response but, as yet, has not been harnessed to finance a shift to longer term adaptation. In addition to its existing disaster contingency products, African Risk Capacity has designed a new sovereign insurance product – the Extreme Climate Facility – that intends to complement existing bilateral, multilateral and private sources of finance that enable proactive adaptation by leveraging private sector funds through the market. In this viewpoint, we argue that the Extreme Climate Facility contributes to the adaptation financing gap while also being innovative in incentivizing disaster risk reduction and adaptation interventions.

Cost-Benefit Analysis of the African Risk Capacity Facility

Governments play a key role in supporting populations affected by natural disasters, including rebuilding infrastructure to ensure continued services and scaling-up public safety nets to prevent widespread hunger and poverty. However, the traditional approach of limiting greater spending to the aftermath of a disaster has many drawbacks. External support from bilateral or multilateral donors can be slow and unreliable. Private sector reinsurance can be prohibitively expensive. And reallocating budgets toward recovery and reconstruction is typically a slow process that can even hurt long-term development by drawing resources away from effective programs. Some countries are trying to mitigate this liability by banding together and creating sovereign catastrophe risk pools that allow governments to coordinate with one another to insure their uncertain fiscal liabilities at lower cost. Countries contribute to the pool, which then provides payments if an insured natural disaster strikes. The African Risk Capacity (ARC), has been proposed as a pan-Africa drought risk pool to insure against drought risk in Africa south of the Sahara. If fully operationalized, the ARC will mark a major change in how donors fund emergency support to countries in Africa during times of need. In this paper, we undertake a cost-benefit analysis of the ARC pool and discuss how lessons can inform the design of the ARC.