ARC Replica

ARC Replica is an African Risk Capacity program that lets a humanitarian organization buy a policy copying a government's own, to add to the funds available when drought triggers. Late in 2019, in Senegal, the rainy season was poor enough for ARC's model to trigger. Two payments went out on the same index: one to the government, the other to the Start Network, a network of NGOs (non-governmental organizations) that had bought a replica policy. The mechanism, launched in the late 2010s, starts from a simple observation. Governments underinsure because they cannot fund the premium, while humanitarian organizations spend large sums every year after the crisis, often too late. The partner, the World Food Programme or the Start Network, buys a policy that copies the country's parameters exactly. The same customization of the Africa RiskView model, the same attachment point, the same season: the two contracts trigger together or not at all. The partner therefore brings no information of its own and does not choose its index, which removes adverse selection. It cannot bet against the government, nor insure on its own a region the state left out. The condition that makes the product worth having is operational. The partner has to file a response plan coordinated with the government's, and the money goes to distributions defined in advance, cash transfers or food, in the areas the model has flagged. The premium is usually paid by donors. For the market, it is extra capacity on a risk already modeled and already underwritten, so with no new underwriting cost. The limit is that of the underlying model: if the index stays silent through a real drought, both policies stay silent with it, and basis risk is doubled instead of reduced.