The impacts of climate change see Africa lose up to 15% of its gross domestic product per capita, every year, suggesting there’s an urgent need to expand the use of alternative risk solutions, such as parametrics, to help more countries effectively navigate the changing climate.
This is according to the African Risk Capacity (ARC), a provider of parametric disaster insurance products to countries and other entities in Africa, who warns that both the social-economic and environmental damage driven by drought, floods, and cyclones further devastates a population where almost 50% already live in extreme poverty.
The frequency and severity of adverse weather events continue to rise around the world, and in Africa, countries’ climate financing is at just 11% of what is required.
Further, according to data from the African Development Bank, around USD 16 trillion is required for Africa to meet its nationally determined contributions as set out in the climate action plan of the Paris Agreement.
Almost 12 months later, says ARC, COP26 pledges of USD 100 billion in climate finance have been slow to materialise, so it’s clear that the African continent needs to boost its resilience to climate shocks.
To address the challenges, alternative risk solutions, notably parametric insurance products, are a viable and useful way to get affordable protection to some of the world’s most vulnerable.
ARC now provides parametric insurance to 35 sovereign member states across Africa and has made numerous, rapid payouts to member states post-event since its inception.
However, there are 55 countries in Africa, meaning that 20 are not benefiting from ARC’s services, and Lesley Ndlovu, Chief Executive Officer (CEO) of ARC, argues that to effectively fight climate change, more countries in the region need to come into the parametric fold.
“One of our greatest challenges is to forge a better understanding of how parametric insurance fits into disaster risk management, while also addressing the cost of insurance premiums. Our sovereign risk pools offer a solution, as countries share the risk and cost. Once our member states have completed a capacity-building programme, they become eligible to join a risk pool,” said Ndlovu.
Through the entity’s sovereign risk pooling, member countries are grouped together and the cost of their individual premiums is lowered. The premiums paid go into an insurance coffer and are subsequently readily available.
So far, ARC has paid out a total of USD 125 million claims, 50% of which was to a single pool in 2021, which ARC says makes the value of Africa’s participation in parametric insurance undeniable.