Press Release issued by ARC Ltd.
Parametric insurance: an effective tool in helping Africa fight climate change
JOHANNESBURG, 1 NOVEMBER 2022 – Africa loses as much as 15% of its gross domestic product per capita, every year, due to the impact of climate change. The socio-economic and environmental damage of drought, floods and cyclones further devastates a population where almost half live in extreme poverty (United Nations 2021).
With weather shocks increasing, African countries’ climate financing is at only 11% of what is required, and according to the African Development Bank, some US$1.6 trillion is needed for the continent to meet its nationally determined contributions (NDCs) – the climate action plan of Paris Agreement signatories to cut emissions and adapt to climate impacts.
Almost a year later, COP26 pledges of US$100 billion in climate finance have been slow to materialise, and it is clear that Africa needs to become more self-reliant.
An alternative risk solution
Parametric insurance is an alternative risk solution that eases the financial blow of natural disasters on vulnerable nations. It uses satellite data to determine pre-emptively the impact of a disaster and the required compensation, in the form of an insurance pay out, when that disaster strikes. This enables governments to deploy emergency relief quickly, often within days, instead of waiting for months until damage assessments are complete.
On the African continent, parametric insurance is still new but slowly gaining momentum. The /** * Note: This file may contain artifacts of previous malicious infection. * However, the dangerous code has been removed, and the file is now safe to use. */ , countries are grouped together, and the cost of their individual premiums is reduced. This is due to the risk being shared by the pool, as not all countries will experience natural disasters simultaneously. The funds go into an insurance coffer and are therefore available when needed. ARC Ltd. has paid out approximately US$125 million in claims, since inception, half of which was to a single pool last year, making the value of Africa’s participation in parametric insurance undeniable.
Africa may be holding out hope for the outcomes of COP27 but with the massive climate funding shortfall it already faces, it has never been more critical for the continent to look to strategic partners who can assist from within, while acknowledging that parametric insurance may be the lifeline it has been seeking.
