Africa lags the world in climate and weather insurance.

The UN Economic Commission for Africa (UNECA) says that 17 of the 20 countries in the world most vulnerable to climate change are in Africa.

Whilst this vulnerability has many faces, the easiest to read are the droughts and floods destroying harvests and threatening the “food security” of Africa’s heavily agrarian populations. Just these past few weeks, more than a 100,000 hectares of farmland have been destroyed in Northern Nigeria.

Insurance has over the years emerged as a major response to such risks, and by 2020 half of all farms in the poorest countries of the world had some form of insurance. In Africa, however, only about 3% do. A sobering figure when compared to more than 50% of farmers in Asia, and when one considers that just 20 years ago, agro-insurance penetration in Asia was less than 0.05%.

Hence, the Africa Risk Capacity, a parametric-index insurance program

Observing this massive gap, African Union strategists drew upon lessons from the CRAIC project (now CCRIF) in the Caribbean to set up a regional climate risk insurance program with a strong emphasis on food security called Africa Risk Capacity (ARC).

The clever core of their design looks beyond individual farms, and targets impacted communities as a whole; pools risks across multiple countries and thereby lower costs for each participating government; and uses a “parametric” rather than “linear” version of the popular “index” method of running a drought or flood insurance scheme whereby losses could be better correlated to the intensity of the events that trigger payouts to victims.

80% of weather insurance programs worldwide are index-based, meaning that they monitor the amount of rain (or other weather gauge) to compute the extent of damage rather than attempting to directly measure the resulting losses and make victims whole again (i.e. they are not indemnity-based). 

But not all such index-based programs are sophisticated enough to fully model the most relevant parameters to try and align their measurement with the likely losses the insurance program is meant to protect against.

Parametric insurance models can be very nerdy, yet cool

The advantage of the ARC’s parametric model is that the payout to the insured isn’t dependent on the rain-measuring index establishing conclusively that a drought or flood has occurred before a payout is triggered. A nifty algorithm attempts to track the trend in rainfall pattern and predict the adverse impacts. A payout can thus be made to community members before the flood or drought completely messes up their lives.

In the specific case of ARC, the data source is a satellite-enabled analytics software called RiskView. RiskView models are cross-referenced against ground station measurements and enhanced to generate predictive indicators of a catastrophic climate event. Participating governments thus obtain early-warning signals that builds up into full-blown preventive program funded by payouts from ARC to prevent deaths and mass suffering.

ARC has actually been making payouts to African countries

In recent years, ARC’s payouts to African countries experiencing extreme climactic stress have grown in size and scope.

In August 2024, about 353,000 households in Malawi received roughly $32 each as drought conditions threatened famine. The month before, about 509,000 households in Zimbabwe were sent aid of about $33 each after the regions they inhabit received less than 20% of their usual rainfall amount.

In its first three years of operation, ARC disbursed about $34 million to 2.1 million individuals, or about $16 per person.

These sums do look small, and some critics have pointed out that in some cases – such as in Malawi in 2016/2017 – the amount of loss covered was just about 2%. It bears noting, however, that there are still more than 400 million Africans living under $2.15 a day. For temporary relief, $32 per household could make the difference between survival and dying from starvation. Consider, for instance, GiveDirectly’s long-running program to show that about $22 a month to a Kenyan family can have some life-improving effects.

Moreover, paying less than the loss incurred is an integral risk in all index-style insurance programs. So much so that there is even a term, basis risk. In the 2017 Hurricane Irma incident, for instance, payouts from the Caribbean equivalent of ARC to Antigua & Barbuda covered less than 3% of losses.

ARC’s real hurdle

The more pressing question thus is whether ARC would prove scalable and sustainable enough to make a difference, even if modest by some critics’ standards, in Africa’s climate-response strategy. The answer to that query is clouded by multilateral and geopolitical intrigues.

After ARC was conceived in 2010 and initiated by treaty in 2012, it took a £200 million funding commitment from the UK’s DFID and Germany’s KFW for its seed capital to be mobilised.

Sources say that these donors used their financing muscle to dominate the ARC design process, including shaping the “performance milestones” that will trigger funding to “ARC limited”, an entity set up in Bermuda to run the insurance program under an MOU with “ARC Agency”, an AU interstate entity. Invariably, the politically powerful AU Permanent Representative Committee (PRC) was rendered effectively toothless by this dual structure, as all the real action shifted to the private entity based in Bermuda. 

Nevertheless, the strong team of African experts put at the helm of ARC Limited quietened tempers. A palpable sense of Africanness could be felt radiating through the institution. Sad though, then, that even after its incubation period, many design decisions appeared to be managed from outposts in places like Pristina, Kosovo, instead of Nairobi or Lagos. Or even the ARC offices in Johannesburg.

Some say that the UN WFP offices in Rome, where ARC’s incubation plans were hatched, remained the site of all consequential decisions for much too long.

African countries struggle to own Pan-African initiatives

Such an outcome was much enabled by the lethargy in AU capitals. Even though 47 African countries endorsed the 2010 resolution, and 35 signed the treaty in 2012, it took 8 years for 10 countries to ratify before it could come into force. All that time, ARC was operating without an in-force treaty.

Getting African countries to subscribe by paying premiums has also proven challenging. African governments like creating new institutions. Paying for them, however, not so much. Consequently, the AfDB had to intervene with a program called ADRiFI which effectively covers the premiums on behalf of countries.

The strong resistance to paying premiums and dues among African countries echo the standard challenges that multilateral programs tend to face in the region. When programs are underfunded to that extent, donors acquire outsized power, member states lose touch, and technical minutiae dominate critical political decision-making.

Lack of true African government ownership pose serious risks

In the case of ARC, tough policy decisions have yet to be made about the threshold for triggering payouts in light of the low appetite of African countries for premium commitments. Madagascar for instance has tapped the facility at least three times since 2022. Yet, the actuarial logic underlying the original ARC model assumed that low frequency events (once in five years) would be the norm.

There was also an assumption that the “risk pooling” effect would depend on low correlation among events in different countries. Practically, however, climate risk events are likely to be highly correlated. 

Furthermore, the model parameters are customizable beyond the somewhat independent indicators captured in RiskView. Countries are thus susceptible to peer pressure and may seek to “match” their neighbours’ eligibility for a payout, leading to moral hazard. 

Lastly, issues of geographical boundary setting, and the precise population at risk, are highly political and could complicate payout calculation as the facility becomes more popular. 

It is not just all technical, though

These seemingly technical issues are in fact heavily dependent on the political economy of policymaking. So also is the actual process of distributing payouts. Unless governments feel that they can leverage the program to political effect, they won’t invest. Yet, government subsidies account for most of the growth in index-based agro-insurance seen in Asia, for instance, with premiums in China attracting a subsidy close to 80%.

Nor are the political economy issues confined to the domestic theatre. In recent months, the intrigues at a regional, multilateral, level seem to have escalated, culminating in AfDB launching a rival to ARC called ACRIFA. Powerful stakeholders in Africa often do that when the backroom jockeying for influence fails to settle matters.

Things have come to a head between the UN and the AU

But it is the usual rivalry between the African Union and the UN system that is producing the most colourful fireworks. The push and pull for attention, donor money, influence, and sheer political relevance between the two bodies periodically spills into the open (think the frequent public health spats between the WHO and Africa CDC).

In 2018, ARC entered a pact with UNECA, the UN’s main agency in Africa. There was no confusion at the time that ARC is a fully-fledged AU agency. Some observers were thus very puzzled when the head of the organisation started using the “UN Assistant Secretary General” title. Some AU insiders fumed about “another UN glory grab”. 

As if on cue, the Head of ARC resigned in August 2024. By September, he had been appointed to run a new UN-originated organisation focused on “loss and damage” due to climate change. Talk of coincidences!

The UN and AU seem set to battle it out

Even though the newly launched Loss & Damage Fund is meant to have a wide remit, and to be able to pool resources and use multiple means to support countries facing catastrophic consequences from climate change, it has become apparent over the last year that its most assured revenue mobiliser would have to be a climate insurance mechanism. 

Notwithstanding expert consensus that insurance vehicles are simply not up to the scale of the challenge, and may well be unjust, the simple truth is that rich countries are donor-fatigued and private sector funds will be hard to attract in the form of donations. In the specific context of climate catastrophe mitigation, insurance is the most combat-ready tool available for pooling resources.

All the strategic blueprints for the Loss & Damage Fund’s financing framework gives clear centrality to insurance.

In fact, the primary contingency measure recognised in the Fund’s operational mechanism is insurance.

Simply put, the UN is going to be competing hard against the AU for insurance premiums from African countries with this new move. Hiring the former head of the AU’s main insurance selling entity is merely the opening salvo. It is a drama made more for Wall Street than the staid world of multilateral development politics.

The “war” between the UN and the AU is playing out at country level

When it comes to fully signing up to ARC and buying insurance premises from its commercial arm, Ghana is one of those countries that has been dragging its feet. A major chunk of the indecision can be attributed to the confusing, seemingly competing, multilateral initiatives jostling for the attention of African countries.

Having signed up to the German-originated Global Shield Initiative, Ghana has made securing donor money to subsidise premiums and build domestic risk analysis capacity paramount. In a major strategic review, it separated its engagement with ARC from the process of buying flood insurance for the Greater Accra region.

Since it left one partner blank in the list of key partners it is lining up to firm up on the Greater Accra risk insurance buying decision, one would assume that Ghana’s indecision was unresolved even at the time of publishing the strategy document. Evidently, the play was to secure insurance from two channels to target different parts of the country.

Yet, when it finally decided to move ahead with firming up the partnership framework to govern the entire activity, ARC was omitted. The UN and the German government were given pride of place. 

PRESS RELEASE: Public-Private Partnership to Develop Flood Insurance and Build Financial Resilience in Ghana

https://www.insdevforum.org/press-release-public-private-partnership-to-develop-flood-insurance-and-build-financial-resilience-in-ghana/embed/#?secret=UpuLAFO9H0#?secret=RrKFatx0kM

A Dutch company called HKV has been found to, more or less, design a parametric framework eerily similar to what the ARC’s RiskView mechanism is meant to achieve. HKV made its first debut in Ghana earlier through a World Bank funded program.

The Big Lesson: no one will give “agency” to Africa on a silver platter

The lessons here are simple. Innovative African ideas, especially those with continental relevance, usually get marginalised because African governments rarely have a sense of ownership. Pan-African institutions themselves are often not geopolitically joined at the hip with national governments; they are often much too deeply involved in the intrigues themselves. 

Both national governments and key regional actors dilly-dally in providing resources and committing fully to innovative African efforts. International actors see this and jump into the fray. They soon discover that it is often just easier to impose templates on the African context than attempt genuine bottom-up co-creation. 

Transcontinental catastrophic insurance is an interesting idea but there is no reason why it should be immune from this general malady. If it is to work at scale in Africa, political jockeying would have to give way to more collective action among African leaders, countries, and regional institutions.