Over the last four decades, sub-Saharan Africa has experienced more than 1,000 disasters. They are a major threat to development, putting recent economic development gains at risk. Africa’s disaster profile is characterized by extreme hydro-meteorological events that will likely increase in frequency and magnitude as a result of climate change. Sub- Saharan Africa’s disaster profile is closely linked to the vulnerability of its population and economy and their often-low capacities to cope with natural hazards.
Towards a Solution
The African Risk Capacity initiative offers an African solution to one of the continent’s most pressing challenges. It was established by African States as a specialized agency of the African Union in November 2012. The overarching aim is to give Member States the financial tools and infrastructure that they need to help to break the negative cycle of drought, low resilience and food insecurity by incentivizing and empowering countries to improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters, thereby protecting the food security of their vulnerable populations.
African Risk Capacity is an innovative initiative for pan-African risk management, offering sovereign-level risk insurance against droughts, floods, cyclones and pandemics through its financial affiliate, African Risk Capacity Ltd, which is capitalized at $200 million. Through African Risk Capacity, African Union members pool their natural disaster risk, shifting the risk burden away from vulnerable populations and their governments to the international markets, which are better equipped to handle them. Thirty-two African States have signed the African Risk Capacity Establishment Agreement to form the Conference of the Parties, representing a transformative moment in African ownership to manage natural disaster risk more effectively.
Specifically, African Risk Capacity addresses the following Sustainable Development Goals (SDGs): SDG 1, by protecting the poor from natural disasters, thereby helping to impede the poverty cycle, and contributing to policy dialogue and transformation by encouraging better risk management and supporting poverty alleviation efforts; SGD 2, by enabling a timely response following an extreme natural disaster to protect people against food insecurity before it reaches a critical level; SDG 13, by providing an objective measure of climate change and channelling financing from the private sector to member States for climate adaptation; and SDG 17, by building strategic partnerships with international institutions, government actors and the private sector and by recognizing that sustainable solutions are dependent on such partnerships.
Countries that choose to join the African Risk Capacity risk pool must enter into a memorandum of understanding with the agency, which governs participation in the capacity-building programme. Countries that have received insurance payouts make presentations on how payout implementation works during the annual Conference of the Parties and the Governing Boards of both the African Risk Capacity agency and the African Risk Capacity Insurance Company Ltd.
African Risk Capacity focuses on working in a sustainable manner to develop national capacities, thereby reducing the reliance on a large agency secretariat, creating national ownership and lowering operational costs. It adopts the following approach: (a) initial country engagement, to conduct scoping missions to understand country context and ensure integration and national ownership; (b) in-country working groups, to ensure that each member State is able to meet the requirements for joining the risk pool; (c) contingency plans, to design operations plans to demonstrate how a country would quickly and proactively implement drought response activities in the event of an extreme drought; and (d) insurance payouts: a country is required to submit a final implementation plan describing the activities that it will undertake with the insurance proceeds before it can receive its insurance payout.
African Risk Capacity has an innovative public-private partnership structure made up of an international organization that provides government services and a nationally regulated company that conducts financial operations. African Risk Capacity operationalizes pan-Africanism through a ground-breaking financial instrument, taking a major step towards transforming the disaster-response paradigm on the continent and pioneering a move towards African ownership.
In the first year of operation of African Risk Capacity, Kenya, Mauritania, Niger and Senegal purchased $129 million in drought insurance coverage from African Risk Capacity Ltd at a total of $17 million in premium costs paid by those Governments. Following a poor agricultural season in the Sahel, by February 2015, Mauritania, Niger and Senegal had received payouts from African Risk Capacity Ltd totalling over $26 million, which enabled them to deliver timely assistance to 1.3 million people and over half a million livestock. This intervention averted a situation that could have forced millions of families to sell off hard-won household assets, take children out of school, migrate, or simply accept that their herds had perished, pushing them further into chronic food insecurity. In May 2015, African Risk Capacity added the Gambia, Malawi and Mali. Each secured drought coverage for the 2015/2016 policy year, making the total insurance coverage for 2015/2016 $178 million, with a corresponding premium of $24.7 million. Support in the form of returnable risk capital to African Risk Capacity Ltd of approximately $90 million provided equally by the KfW Development Bank on behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) and the United Kingdom Department for International Development demonstrated proof of concept. With requests from African Governments to access coverage for additional perils through African Risk Capacity Ltd, the agency is now expanding its products from drought to cover flood and tropical cyclone risks across the continent.
African Risk Capacity provides member States with a package of support that guarantees a holistic approach to capacity-building, addressing areas that require development. In addition, it is developing a strategy to become a self-financing group. Through the growth of African Risk Capacity Ltd, the agency, as broker and client manager of the company, can develop a financial strategy together with the company to support its operational costs through an allocation of a percentage of the company’s capital. The agency model is replicable in other parts of the world, particularly in areas where there is already a functioning entity for regional cooperation.
Sustainable Development Goal targets: 1.a, 1.5, 2.4, 13.a, 13.1, 13.2, 13.3, 17.3, 17.9, 17.16, 17.17