Nigeria is yet to benefit from Africa Risk Capacity (ARC) that is enabling participating African governments to insure themselves against natural disasters and respond rapidly when their citizens experience harvest failure.
Zimbabwe has just benefited, as a global network of humanitarian agencies announced the purchase of an innovative insurance policy in partnership with African Risk Capacity (ARC) and the Government of Zimbabwe to protect more than 800,000 people in Zimbabwe from drought risk during the 2021/2022 agricultural season.
The $2.5 million policy purchased by Start Network and provided by African Risk Capacity is built on parametric insurance. This means it pays out before a crisis, according to pre-agreed scientific triggers, based for example on rainfall data.
While a lot of member countries have benefited in one investment or the other, Nigeria is yet to tap from it, having signed a Memorandum of Understanding since 2014.
Babajide Olatunde –Agbeja, chairman /CEO, Boff & Co Insurance Brokers Limited speaking at a recent media partly with insurance journalist, sponsored with B. Adedipe Associates Limited in Lagos spoke of the need for improved capacity in the Nigerian insurance market.
Agbeja, called for increased capacity within the local market to help grow retention of risks.
According to him, “The capacity is growing but we need to back it up with technical know-how, training and retraining of staff. The insurance industry should keep pace with the trend of events globally because insurance business is an international business.”
ARC was established as a specialized Agency of the African Union (AU) to help member states improve their capacities to better plan, prepare and respond to extreme weather events and natural disasters. Through its first financial affiliate, ARC Ltd, the institution provides African governments with innovative risk management and risk transfer tools and services towards creating a comprehensive pan-African disaster response system.
ARC uses satellite information to track rainfall during a country’s growing season, comparing this with the local crop’s water requirements. At the point of harvest, the model can predict whether the harvest is likely to have been successful, or failed, and the likely humanitarian response cost. When an insured event occurs, the insured government uses the ARC payout to launch early response activities as set out in their pre-agreed contingency plan.
Mikir Shah, CEO African Speciality Risk, another agency had stated that there is a coverage gap that needs to be filled in the African continent.
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He said this coverage gap represents a significant step towards unlocking investment across the Continent. So, building capacity among local insurers is an essential piece of this puzzle as international investors and corporates have been limited to sourcing covers in the global market.
Africa Specialty Risks (ASR) is a reinsurance business focused on the provision of bespoke risk-mitigating insurance solutions and founded in 2020 with financial backing from Helios and major international investors such as CDC, IFC and Fairfax.
Shah said that ASR’s mandate is “focused on Africa and to deliver what those investing in Africa need in terms of risk mitigation”. To do this ASR’s teams work closely with local insurers, providing training and, crucially, leveraging the company’s technical abilities to insure against complicated local risks.
“We have technical skills that can complement and enhance local stakeholder capabilities,” Shah explains. This approach allows ASR’s experience of complex risk mitigation drawn from across the Continent as well as other global markets to be deployed by local insurers who provide ASR with further on-the-ground knowledge.”
He further stated that this kind of localised risk insurance can provide “real comfort to international investors and corporates”.
“Credit and currency risks have long been seen by investors as a barrier to entry for African markets. Fluctuating exchange rates threaten returns and exits while political instability makes for challenging operational climates. Investors and businesses “need to know that assets won’t be taken away or whittled down to zero…that’s the first step…then they can invest the money”.
Therefore, for development finance institutions as well as private investors, helping Africa’s insurance market reach maturity is critical to achieving wider economic and social development goals.
Ultimately, political risk and uncertainty are not uniquely African phenomena Shah highlights, stating that risk exists no matter where you are.
“With the Covid-19 pandemic providing the ultimate unforeseen event and political destabilisation in many Western markets, “we’ve seen a rebalancing of the perception of risk over the last 24 months”.
“Political risk mitigation products play a critical role in building a healthy investment ecosystem no matter the market and were available in the West prior to their adoption in Africa. According to Shah, “across the Continent you’re now seeing awareness of different products…and that’s the most important part”. For the insurers across the Continent, the priority is now to build out products specifically tailored to the African market. For ASR, this on-the-ground presence and knowledge are essential to building targeted products across the country and regional levels, he said.
Building out African-focused insurance and reinsurance products now can also lay the groundwork to support businesses and investors against future risks such as climate change. “As insurance companies, we can’t have the same impact on climate change as other industries,” Shah explains, “but what we can do is have products that mitigate the impact of the volatility driven by climate change.” Despite its minimal contribution to emissions, Africa is particularly vulnerable to the effects of climate change.”
Shah remains bullish about both the growth of Africa’s insurance sector and the economic development of the Continent as a whole.
“The innovation you get in Africa is on a different level because of the need,” he concludes. The Continent has been a leader in the uptake of mobile money, for example, which has been used to solve specific challenges around financial inclusion and confidence in transactions.”
