The African Risk Capacity (ARC) will assist the Malawi Government to scale up the World Bank’s Social Support for Resilient Livelihoods Project (SSRLP) through innovative insurance, which reinforces Malawi’s Social Cash Transfer Programme.
Malawi’s flagship safety net, the Social Cash Transfer Programme (SCTP), will be reinforced with a risk transfer instrument to provide additional liquidity for the response to future droughts, which has been implemented since June 2020.
This development is part of an upscaling and risk-layering approach to protect additional vulnerable households against climatic shocks plus ensure earlier and rapid access to funding.
The World Bank’s SSRLP aims to build human capital among poor and vulnerable populations through Social Cash Transfers (SCTs), livelihoods support, and Enhanced Climate Smart Public Works, as well as an option for scalable financing for SCTs to reach more affected households following weather-related disasters.
The SCTP includes a mechanism to scale up the response to droughts in six districts in Malawi, explains ARC. In the long term, the mechanism will target all 28 districts, as well as one that responds to a wider range of climate risks and leverages more sources of financing, including donor funding.
The approach harnesses a new insurance product designed for the government to fund this scale-up, underwritten by parametric insurer ARC.
It will be partly used to cover the costs of scaling up the SCTP in the 2023/24 and 2024/25 agricultural seasons, should rainfall deficits occur. ARC explains that this will be complemented by additional flexible contingency financing to act as a deductible to the insurance product. Funding support for this is provided by the World Bank and the Global Shield Financing Facility.
As reported by ARC, the SCTP scale-up mechanism was first implemented during the 2021/22 rainy season in the three districts of Blantyre, Ntcheu, and Thyolo. Around 74,000 households were made eligible for a cash transfer. A drought resulted in an additional cash transfer for approximately 320,000 individuals totalling $6.3 million, which the government withdrew from its contingency reserves.
In Malawi, 75% of the population lives below the international poverty line, hence introducing a shock-responsive mechanism poverty is pervasive.
Mulder Mkutumula, Scalable Component Co-ordinator at the Malawi National Local Government Finance Committee, commented, “In the event of a disaster, the immediate reaction among individuals is to engage in negative coping behaviours to survive, such as selling assets like their livestock. This results in increased poverty. Providing the very poor households with resources before the impact of a drought is felt, helps prevent negative coping behaviours.”
Robert Chase, Practice Manager for Social Protection and Jobs for East Africa at the World Bank, added, “The World Bank sees Shock Responsive Social Protection mechanisms as key to ensuring that financial support quickly reaches vulnerable households after a shock.
“Demonstrating how this can work is a vital contribution to investments in human capital resilience, investments that are so necessary as shocks become more frequent and potentially harmful. With the support of the Global Shield – Financing Facility, the government has combined social protection delivery mechanisms with a financing plan, which the risk transfer policy is one part of. We expect to learn a lot from the mechanism being implemented in Malawi.”
For the 2022/23 season, it has expanded to cover three additional districts, namely Chiradzulu, Karonga and Nkhotakota, and reached 500,000 people in the six districts where it was implemented.
David Maslo, Head of Business Development, added, “ARC Ltd. and the Government of Malawi designed the insurance product so that it is aligned with the country’s existing triggers for the SCTP scale-up mechanism. This is a ground-breaking innovation for ARC. This new product is a step in the right direction towards managing the impact of climate change in Africa so that all those impacted will be assisted. It is a model to replicate throughout the continent.”
“This is also complemented by the ARC Sovereign insurance policy, which covers some of the other response costs incurred by the government in the event of a severe drought. With our deep understanding of disaster risk financing, we continue to assist our member states, such as Malawi, to diversify their DRF portfolio with a range of products that are fit for purpose. We are also delighted to simultaneously be growing our partnership with the World Bank,” added Maslo.
Lesley Ndlovu, ARC CEO, concluded, “This innovation follows shortly on the heels of our pioneering multi-year, multi-peril product designed for Djibouti, which saw us covering excess precipitation for the first time in our history. In Malawi, we have demonstrated once again the company’s inherent agility and flexibility in being able to underwrite a policy on a new product and a new set of indices.”