ARC urges Africa to embrace parametric insurance for climate change challenges 

Cynthia Ezekwe

The African Risk Capacity (ARC) Group has made an urgent call to action, urging African nations to embrace the innovative and effective policy design of parametric insurance to mitigate the destructive impact of climate change on the continent.

The African-owned, index-based weather risk insurance pool and early response mechanism highlighted the significant benefits of parametric insurance in providing a financial safety net against climate-related shocks and ensuring a more resilient and sustainable future for the region.

Parametric insurance is a pioneering approach to risk management that stands apart from conventional insurance methods. Rather than compensating for losses incurred, parametric insurance offers financial protection against the likelihood of loss-causing events, such as earthquakes, tropical cyclones, or floods, by providing indemnity based on a predefined intensity threshold as measured by an objective value known as the ‘parameter’. This shift from indemnifying actual losses to covering the probability of loss-causing events ensures a more efficient and flexible risk management solution, particularly in situations where conventional insurance may not provide adequate coverage.

ARC in a recent report titled “The State of Natural Disasters in Africa”, dwells on  the growing concern of  the increased frequency of weather-related natural disasters and their devastating economic impact on the continent. The report not only highlights the heartbreaking toll on human life, but also the economic devastation wrought by more frequent and severe weather events, including droughts, floods, and other calamities that displace communities and uproot livelihoods.

Analysing the economic burden of weather disasters on African nations, the report provides insights into the cost of disaster risk management, explores the current trajectory of weather events, and proposes response mechanisms for effective disaster management.

The ARC report unearthed an alarming trend in the frequency of weather-related disasters across Africa, with a staggering increase from 32 disasters in 2014 to 56 in 2023. With floods as the predominant factor, 29 African countries have been left reeling from the devastating aftermath of these disasters. The report estimates that $2.2 billion was spent on disaster management across the continent in 2023, with Libya bearing the brunt of the financial burden, accounting for 25 percent of the total cost, 0.5 percent of its GDP.

“In the 29 African countries where statistics were available, 1,436 disaster events were recorded between 2000 and 2023. Notably, 66 percent of these events were associated with floods, 15.4 percent  with storms, and 11.7 percent  with droughts.

“Despite the relatively lower number of drought events over the 23-year period, the available data shows that droughts have the highest negative impact in terms of the number of people affected. For instance, in 2014, about five recorded drought events affected more than 25 million people, whereas 20 flood events affected less than one million people. This observed pattern is consistent in the timeframe covered by the data,’’ the report noted.

Africa’s struggle with natural disasters has reached a high level, ranking third among the continents in terms of the highest number of weather-related disasters, just behind Asia and the Americas. In 2023 alone, 65 percent of recorded disasters in Africa were due to devastating floods, with an additional 22 percent caused by storms. These calamities have had an unthinkable toll on human life, claiming over 17,000 lives and leaving more than 10 million people adversely affected. The report also highlighted the growing scourge of prolonged droughts in arid and semi-arid regions of Africa, where Somalia, Ethiopia and Kenya are particularly hard-hit.

The ARC report offers a sobering window into the countries that have borne the brunt of weather-related disasters since the year 2000. Standing at the epicentre of this devastation are South Africa, Mozambique, and Madagascar in southern Africa; Nigeria in the west; and a swath of countries stretching from Angola to Ethiopia and Somalia in the Horn of Africa. Heavy rainfall, which has wreaked havoc on communities, has been exacerbated by human actions such as deforestation and inadequate land management practices, underscoring the critical importance of sustainable resource management to mitigate the impact of natural disasters.

Beyond the economic costs, the ARC report also uncovered the devastating health impact of natural disasters in Africa. The changing weather patterns have opened a pathway for the proliferation of waterborne diseases like cholera and insect-borne diseases like malaria, posing a serious threat to the progress made in combating these epidemics since 2000. Moreover, the consequences of natural disasters often hit women hardest, as resource limitations and structural factors expose them to higher risks. Despite natural disasters being gender-blind in their occurrence, their aftermath is not, and this disproportionately impacts women, highlighting the need for greater awareness and support in disaster response and preparedness.

Recognising the dire need for proactive measures in climate risk management, the ARC report urged African countries to prioritise investments in early warning systems. The organisation highlighted the global campaign “Early Warnings for All” which seeks to ensure that every person in the world is covered by early warning systems by 2027, with initial efforts focusing on least developed countries. In Africa, the Africa Multi-Hazard Early Warning and Early Action System is working towards a similar objective, aiming to coordinate efforts between government and donor organisations to double African coverage to  80 percent of the continent.

“It’s simply unacceptable that only 40 percent  of Africa is currently covered by EWS and even those are compromised by quality issues. Just 24 hours’ notice of an impending hazardous event can cut the ensuing damage by up to 30 percent,” noted Ibrahima Cheikh Diong, UN assistant secretary-general and ARC group director general.

According to the United Nations Office for Disaster Risk Reduction, countries with substantial to comprehensive early warning systems coverage have one-eighth the disaster mortality of those with limited or no coverage, highlighting the significant benefits of investing in EWS in terms of saving lives.

In its efforts to build a robust and effective climate response system in Africa, ARC has integrated four essential elements into its approach: capacity building, early warning, risk pooling, and risk transfer.  It noted that these critical elements, combined, create a powerful synergy, enabling member states to build resilience against extreme climate risks and disease outbreaks.

ARC’s report revealed a heartening trend in African countries’ approach to disaster risk reduction, as evidenced by the increasing number of nations participating in ARC’s risk pools. Over the last decade, ending in 2023, the insured value rose from $129 million to $186 million, with drought being a significant focus for the insurance. Despite the economic challenges faced by African countries, the number of insured nations has steadily increased, from four in 2014 to thirteen in 2022, jumping to 24 countries in 2023.

Ibrahima Cheikh Diong, the director-general of ARC, stressed the urgency of developing more robust disaster risk strategies in Africa. With climate change’s unrelenting onslaught, the continent has witnessed a surge in the frequency and intensity of weather events such as droughts and floods, resulting in devastating consequences for human life. Diong underscored the critical importance of understanding the state of disaster risk management in Africa and its associated opportunities and challenges, as this understanding will serve as the foundation for crafting effective and targeted response strategies.

“Africa’s journey to managing disasters and building resilience is gaining momentum, but there’s much ground to cover. With competing development priorities like education and healthcare, many countries lack sufficient resources to build robust disaster risk management strategies. From the findings of this research, the urgent need to enhance capacity-building efforts for risk reduction in Africa is evident,’’ Diong added.