African Risk Capacity (ARC)
Pan-African mutual offering states sovereign parametric insurance against drought and other disasters.
African Risk Capacity is a pan-African institution, attached to the African Union, that offers member states sovereign parametric insurance against natural disasters, first drought, and increasingly cyclones and epidemics. Participating countries pay a premium and receive rapid indemnification when a modeled severity index exceeds a predefined threshold, allowing an early response to be financed before the humanitarian crisis worsens. The scheme pools risk at continental scale and uses international reinsurance to absorb peak losses. It embodies the application of catastrophe finance to the sovereign protection of vulnerable countries, in line with other regional facilities such as those of the Caribbean or the Pacific. ARC illustrates how parametric techniques can transform reactive emergency aid into planned, triggerable financial protection. For reinsurers, it constitutes a channel for accessing African sovereign risk and an instrument for reducing the climate protection gap.
African Risk Capacity made its first payouts in January 2015 to Senegal, Mauritania and Niger after the poor 2014 rainy season. In 2016 its model initially failed to trigger a payout to Malawi despite an observed drought, and the institution paid roughly eight million dollars after recalibration, a case that became the reference point for sovereign basis risk.
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