Village in the Somali region of Ethiopia where nomads have settled because of the ongoing drought

Africa: Cooperation in action Insurance policies against drought effects – ARC and ARC Replica

The African Risk Capacity (ARC) and ARC Replica provide support to African countries' efforts for better drought preparedness and offer them protection against financial losses from drought. This facilitates quick and effective assistance.

Drought poses a particular risk for African countries, and climate change will exacerbate the problem. The African Risk Capacity (External link) (ARC) Ltd., an insurance scheme for natural disasters, was set up by the German government together with the UK at the initiative of the African Union. KfW implements this effort on behalf of the BMZ. ARC offers African countries insurance against drought. This is vital when crops fail. ARC differs from other risk pools in that it links financial disaster risk coverage closely with an early warning system and anticipatory contingency plans to be adopted by client countries. This makes it possible to provide assistance to those affected very quickly and effectively. Moreover, ARC insurance is designed in such a way that it creates incentives for African countries to improve their resilience to drought. In addition to drought insurance, ARC is currently developing new products, for example for tropical cyclones, floods and pandemics.

More than 30 African countries have joined ARC, which gives them access to risk management and insurance products, provided they meet certain conditions and have Certificates of Good Standing. By the end of 2020, ARC had paid out 65 million US dollars to Mauritania, Senegal, Malawi, Niger, Zimbabwe, Madagascar and Côte d'Ivoire, assisting more than 3.2 million people in severe drought situations.

In 2018, ARC Replica was launched to complement the insurance products for governments. ARC Replica gives humanitarian players (so far, this has been the United Nations World Food Programme and the Start Network, an international alliance of more than 50 aid agencies) an opportunity to join forces with African governments with a view to preparedness for natural disasters. This includes joint risk analyses, the drafting of joint contingency plans, and taking out ARC insurance on behalf of African countries. In countries where ARC Replica is active, the coverage level of ARC policies for the countries in question has risen significantly in some cases. Thanks to ARC Replica, climate risk insurance is becoming an important element of the reform of the humanitarian system towards a greater focus on preparedness.

The first disbursement of funding through ARC Replica took place in 2019 in Senegal. Over the course of 2019, indications that a drought was developing had become stronger and stronger. As a result, the disbursement of insurance benefits was triggered in September based on an estimated amount. As early as in the beginning of November, payments of 23 million US dollars were initiated. Some 12 million US dollars went to the Government of Senegal, and 11 million went to the Start Network. This was the first time that a disbursement to a non-governmental entity was made from a risk pool intended for governments. The money was used for life-saving preventive measures in Senegal, such as the distribution of food and feed. This made it possible to ensure that crop failure did not lead to a broader humanitarian disaster. The example shows that climate-related disasters cannot be prevented altogether but more timely and predictable responses are possible. This approach enhances local capacity for adaptation and strengthens resilience.