Africa: Covering crop failure Insurance policies against drought effects – ARC and ARC Replica

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German development cooperation with the African Union Internal link

Many African countries are particularly frequently hit by drought – a risk which will be exacerbated by climate change. The African Risk Capacity (ARC) (External link) was set up by the German government and the UK at the initiative of the African Union. It offers insurance solutions for natural disasters. KfW Development Bank implements ARC 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 with an early warning system and country-level anticipatory contingency plans. This facilitates quick and targeted assistance for communities affected by drought. 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 to provide cover against tropical cyclones, floods and pandemics.

More than 39 African countries have joined ARC. The scheme gives them access to risk management and insurance products, provided they meet certain requirements and have Certificates of Good Standing.

In 2023-24 alone, ARC payouts totalled 105.5 million US dollars. These high disbursements came in response to the severe drought in Southern Africa in early 2024, which was related to the climate phenomenon El Niño and to climate change. Based on the previously agreed contingency plans, the people affected received rapid aid, for example in the form of cash transfers, food vouchers, and food. ARC thus made a significant contribution towards preventing a humanitarian crisis in the countries affected.

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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 alliance of more than 90 humanitarian aid agencies) an opportunity to join forces with African governments with a view to preparedness for natural disasters. This collaborative effort includes joint risk analyses, the drafting of contingency plans, and taking out ARC insurance on behalf of the respective countries. In countries where ARC Replica is active, its activities can increase the coverage level of ARC policies significantly.

Thanks to ARC Replica, climate risk insurance is becoming a key element of the reform of the humanitarian system towards a greater focus on preparedness.

One example which illustrates the instrument's effectiveness is the first disbursement made in Senegal in 2019. Over the course of the year, weather indicators had been showing that a drought was imminent. The disbursement of insurance benefits was triggered in September, with disbursements of 23 million US dollars being effected in early November. Some 12 million US dollars went to the Government of Senegal, and 11 million US dollars went to the Start Network. This was the first time that a risk pool for governments provided funding to a non-governmental entity.

The money was used for life-saving preventive measures in Senegal, such as the distribution of food and feed. This made it possible to prevent the drought from causing a broader humanitarian disaster.

The example shows that climate-related disasters cannot be prevented altogether but their impact can be mitigated significantly by rapid and predictable responses. ARC and ARC Replica strengthen affected communities' local capacity for adaptation and resilience.