New insurance scheme boosts Africa’s battle against climate change

Africa’s struggle to cope with the impacts of climate change has received a major boost this month with the very first policies to insure governments against food insecurity caused by droughts.

At the moment, many African countries have to rely on emergency aid from abroad when they are struck by natural disasters, including extreme weather.

This means that the amount of money available, and the speed with which it is provided, for the humanitarian response to an emergency is uncertain. Holding up assistance to people who have been affected places more lives at risk and can increase overall economic losses by up to five times.

However, the African Risk Capacity Insurance Company, which has been set up under the auspices of a new agency of the African Union, will be able to pay out an agreed amount as soon as a drought occurs, because it is triggered by measurements of low rainfall.

This eliminates the need for countries to undertake the expensive and time-consuming process of assessing the amount of damage and making a claim, as happens with typical insurance policies, before they receive a payment.

The insured countries are now able to plan in advance their response to a drought, and prevent it leading to a full-blown humanitarian crisis, based on the knowledge that they will promptly receive a pre-determined sum of money based on estimates of its severity as well as the vulnerability and exposure of the population.

The insurance company is a mutual that is owned by its Members, which include the African governments that use it, along with donors. The UK Department for International Development, together with Germany’s development bank KfW, have committed up to US$200 million to support the new company.

The company this week announced that it had issued policies to the governments of Kenya, Mauritania, Mozambique, Niger and Senegal, providing US$135 million in drought insurance coverage.

The company uses computer software developed by the United Nations World Food Programme to estimate during a growing season what it could cost to respond to crop failures due to a lack of rainfall.

Pay-outs are made at the end of the growing season if the estimated cost of managing the greater food insecurity is higher than a pre-determined threshold that is chosen by each country.

The countries have been required to provide details for approval in advance about how they would use the money if they receive a payment and how they would be able to help people within 120 days. The company has promised to make pay-outs to countries within days of the threshold being met, which means assistance could reach those affected up to four months earlier than traditional emergency aid to African countries usually does.

An independent cost-benefit analysis commissioned by the African Union’s agency concluded that for every US$1 spent on early response to a drought, up to US$4.40 is prevented in economic losses.

The establishment of the insurance company is an example of the innovative ways in which African countries are beginning to make themselves more resilient to current and future climate.

Africa is home to many of the poorest people in the world, who are also most vulnerable to rising temperatures and other impacts.

A report by the Intergovernmental Panel on Climate Change (IPCC), published at the end of March, concluded that African countries are already being hit by climate change, and are finding it difficult to cope.

It points out that average temperature has increased by at least 0.5 centigrade degrees during the past century over most parts of Africa and that despite a lack of long-term weather records, there is evidence in many regions of shifts in rainfall patterns.

For instance, over the past 30 years, there has been a reduction in the amount of seasonal rainfall between March and June in eastern Africa, which is thought to be linked to rapid warming of the Indian Ocean.

In 2011, the Horn of Africa suffered severe drought, which was the worst on record in some places. It affected more than 13 million people in Ethiopia, Somalia, and Kenya. Tens of thousands died and hundreds of thousands more were displaced, as the lack of rain caused crops to fail and a famine took hold in some places.

A review by Dr Hugo Slim of the Oxford Centre for Ethics, Law and Armed Conflict concluded that “late humanitarian response was a problem in all three countries”, even though the international community provided relatively prompt assistance.

The IPCC report warns that, although it is not certain how rainfall trends across Africa will be affected by climate change in the future, drought will continue to pose a serious threat to the supply of food and water.

The report states: “Africa’s food production systems are among the world’s most vulnerable because of extensive reliance on rainfed crop production, high intra- and inter-seasonal climate variability, recurrent droughts and floods that affect both crops and livestock, and persistent poverty that limits the capacity to adapt”.

It recommends “in the near term, better managing risks associated with climate variability may help to build adaptive capacities for climate change”.

The report notes the potential for insurance and other arrangements to pool risks between countries to help cope with threats to agriculture, which not only needs to provide food for Africa’s rising population, but is also an important source of employment, particularly in the sub-Saharan region.

The creation of the insurance company is an important step towards Africa becoming more resilient against the impacts of the climate now and in the future.

Bob Ward is policy and communications director at the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment at London School of Economics and Political Science.