How anticipatory insurance can help Africa better prepare and respond to disasters

Author

David Maslo

Source(s)
World Economic Forum
African Risk Capacity
  • Disaster risk financing in Africa needs innovation amid increasing risks and decreasing humanitarian aid and national budgets.

  • Anticipatory insurance is just such an innovation, with the potential of boosting risk management and disaster impact mitigation.

  • OCHA and ARC are piloting anticipatory action and insurance, to positively influence the disaster response financing sector.

From Madagascar’s deadly tropical storms to the 22 million people in Somalia, Ethiopia and Kenya struggling to find enough to eat, Africa bears the scars of climate change despite it being the lowest contributor to the greenhouse gas emissions that fuel it.

Of the 10 countries most vulnerable to climate change, seven are in Africa. Almost half its population lives in extreme poverty, and more than 281.6 million people are hungry.

With numbers like these, there can be little debate that the rising frequency and intensity of climate change-induced events across Africa requires an innovative approach and smarter collaboration which responds much faster to extreme weather events than traditional humanitarian approaches.

Disaster forecasts key to anticipatory action

Put plainly by Mami Mizutori, Special Representative of the Secretary-General for Disaster Risk Reduction at the United Nations Office for Disaster Risk Reduction (UNDRR): “If we act early, we act smart”.

We can act early, leveraging technological advances and existing solutions to forecast, plan for and respond to natural hazards before they become catastrophes.

“Trigger, money and action” – that’s the framework used by the UN Office for the Coordination of Humanitarian Affairs (OCHA) to explain anticipatory action, which relies on the ability to forecast the potential impact of disasters using science and data to trigger pre-determined actions which are pre-funded to protect vulnerable communities from displacement, disease, loss of livelihood and so on before they reach crisis levels.

But anticipatory action needs to be funded at scale. This is where disaster risk financing instruments intended for governments of vulnerable countries, such as insurance and risk layering, are useful as they ensure that different financing instruments match the requirements of different levels of risk.

Take that a step further and overlay how these diversified instruments could impact levels of risk at different points in time – this time-layering approach is already being tested on the ground in Africa by OCHA and African Risk Capacity (ARC). OCHA is also bringing its experience and learnings from anticipatory action to the insurance sector.

An alternative risk solution to predictable crises

What would it have meant for the starving millions in the Horn of Africa if anticipatory action had been taken? If countries like Somalia, Ethiopia and Kenya had benefited from the release of funding to fuel action before the peak impacts of a predictable crisis?

The drought in the Horn of Africa is but one climate-related emergency the continent has faced this year. In 2022, ARC has already paid out $59.6m and covered 18 million individuals in countries like Mali, Malawi and Madagascar.

These payouts that were triggered by a set of pre-determined parameters, due to the countries having signed up for a drought risk pool run by ARC Group, a specialized agency of the African Union.

 ARC Ltd, its financial affiliate, links insurance payouts to contingency plans to ensure a faster and more targeted anticipatory action response.

Since its inception in 2014, ARC has shown that the parametric insurance model works and is impactful, as demonstrated by its payouts of $124.3m in claims from eight risk pools covering more than 100 million people and transferring $1bn risk.

The payouts assist governments to support their affected populations quickly, helping them rebuild and recover from the effects of a drought or tropical cyclone and ensuring they have the means to bounce back swiftly, instead of resorting to negative coping mechanisms.

Piloting anticipatory insurance in Africa

ARC’s existing drought product is forecast-based as it models the short- to medium-term impact of the current drought on the vulnerability of populations – that is the number of people who will be affected in the lean season – allowing contingency plans to be tailored to respond swiftly and in a focused way.

Payouts are made at the end of the agricultural season to respond to the disaster within several months, more than doubling the value of each dollar disbursed compared to traditional humanitarian aids.

Despite this, there could be ways to detect drought earlier and speed up the payout process to anticipate the impact of drought even further. The cost of response at the end of the agricultural season could be further mitigated if we respond earlier, thus reducing the vulnerability of populations under the usual ARC trigger.

Working with OCHA, ARC is marrying anticipatory action and insurance approaches, piloting the concept of anticipatory insurance in Malawi and Zambia by modifying its existing products to develop an innovative parametric insurance solution that enables payouts right after the sowing window.

The amount paid would be calculated on the level of failed sowing and the forecasted impact of these failures by the end of the season.

The current ARC drought policy does cover drought impacts in the sowing window, but it does so along with other shocks that may materialise during the season, offering coverage from November to April with activities, including planning, lasting up to six months after the payout, starting typically in May.

In the case of the anticipatory insurance product, coverage is for November up to mid-January with an immediate payout still within the month, and activities taking place from February to April.

Emphasis placed on better preparedness

The implementation is capped at three months and approval and planning processes are streamlined to enable quick action. Emphasis is also placed on preparedness and making contingency planning more anticipatory, provided for within the ARC programme and supported by OCHA.

This is particularly critical to create the virtuous feedback loop that will compound the effect of anticipatory action until the end of the season up to the lean season.

In this way, anticipatory insurance will offer dedicated sowing protection by, for example, distributing seeds for subsistence crops, such as potatoes that can be sowed later in the year. Farmers could grow crops mitigating the considerable impacts that late rains or periods of dryness during the start of the rainfall season have had on food and income security.

The anticipatory insurance product used helps with risk management and impact mitigation, which means that the conventional drought policy can be used instead for addressing residual impacts. Potential advantages are that countries will not have to transfer as much risk into the market and insurance will also be made more accessible.

To be successful, these actions require an even higher level of preparedness, both operationally and financially, than ARC’s usual parametric insurance because the time for action is extremely narrow. Part of OCHA’s mandate is to support governments and partners with enhanced contingency planning and preparedness, which will be harnessed in the pilot.

For financing this, a third trigger based on pre-seasonal forecast could activate anticipatory action so that, for example, if the forecast is bad at the beginning of the agricultural season, a provision on alternative seeds is made.

Finally, there is an opportunity for ARC to further micro and meso insurance schemes, with well-identified beneficiaries and supply chains to complement sovereign policies by bringing operational speed and transparency into the disaster risk management framework.

Benefits of anticipatory insurance

The foundation has been set to effectively test anticipatory insurance, but the benefits are already clear: most notably its potential to get ahead of peak humanitarian impact by ensuring earlier loss calculation, payout and fast implementation, still within the season.

And while currently there is little to no evidence of anticipatory insurance, pilots like those OCHA and ARC are pursuing on the ground help to shape the financing system and pave the way for further much-needed reform and innovation.

We have only just begun to explore an innovative approach to anticipatory action that could positively influence the broader disaster response financing community and turn the conversation from counting the cost of climate change to counting what we have managed to save by acting smart.

 

 

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