African countries plan to extend a new catastrophe insurance fund to include protection against epidemics in the wake of the devastating Ebola outbreak.
The African Risk Capacity (ARC) agency, a hybrid mutual insurer, was set up by the African Union in 2013 with a $200 million seed capital from British and German development institutions to help African states pool their risks against natural disasters such as droughts, floods and cyclones. That money will be paid back without interest in 20 years’ time, allowing the ARC to offer below-market premiums to African states. The insurance is designed to cover unusually severe or rare events, rather than the perennial chronic food shortages that still plague many poorer African states.
The ARC paid $25 million in its first year of operations to Senegal, Mauritania and Niger to mitigate the effects of a severe drought in the arid Sahel region south of the Sahara – well above the $8 million in premiums paid by those countries. The other African nation to take out a policy, Kenya, paid $9 million but received no insurance payment.
Richard Wilcox, the ARC’s director general, told Reuters that its success so far had encouraged 12 countries to sign up for policies for the second year. African states, he said, have also approached ARC to develop insurance against epidemics after the Ebola outbreak in West Africa killed more than 8,800 people in Guinea, Liberia and Sierra Leone – severely damaging their economies.
‘The scale of the Ebola crisis in those three countries was a wake-up call to everybody,’ Wilcox told Reuters, adding that his agency was working with virologists and other experts to design a system of coverage. ‘Technically, this is much harder than the weather risk because with weather we have 30 years of reliable data. Disease outbreaks are much rarer.’
Mining companies have suspended expansion plans, agricultural production has slumped and tourists have avoided the region.
By pooling disaster risks across east and west Africa, which have uncorrelated rainfall patterns, the ARC is also able to undercut commercial insurers. On top of drought coverage, the fund will offer cyclone and flood insurance next year.
By making use of reinsurance, ARC was only liable for the first $15 million in payments this year – meaning that it received $2 million more in premiums than it paid out. On an average year, it would expect to do even better, Wilcox said.