Insuring against dry days in Africa

Soaring temperatures and the severity of this year’s drought have taken some by surprise in southeastern and eastern Mauritania. When rains are normal people only dip into their cereal reserves from June/July in the following year, but in mid-2012 people have already been without food for more than three months, and many pastoralists in the region have lost the animals on which they depend for a living.

Livestock farming is the second biggest export earner so the loss extends to the national purse.

Mauritania is poor - among the bottom 30 in the UN Human Development index - and recently asked for US$95 million to help respond to the crisis. But if it had signed up for a pooled drought risk insurance facility, it could have had up to $30 million to help respond within weeks after the weak rainy season ended in October 2011, said the World Food Programme (WFP).

In any given year a thin rainy season in Mauritania is probable, but this cannot be predicted with certainty says WFP, which is helping the African Union (AU) set up the Africa Risk Capacity (ARC) insurance and early response facility. The objective is that the insurance will pay out when an extreme event occurs - in this case drought - rather than in the case of persistent or localized arid events that occur often or even every year.

By linking insurance payouts to effective response plans, ARC aims to help African governments reduce the negative impact of droughts on the lives and livelihoods of the vulnerable, while decreasing reliance on external aid. "We are still in the design phase, and if all goes well we hope to establish the ARC in mid-2013 or so," said Joanna Syroka, programme director of the project.

The ARC is modelled on the Caribbean Climate Risk Insurance Facility (CCRIF), a non- profit pooled insurance scheme created in 2007 for the 16 members of the Caribbean Community (CARICOM), which pay comparatively low premiums and get quick payouts when a member is hit by a hurricane or an earthquake.

However, the ARC will be modified to reflect the continent's weather and food security context, bringing together the concepts of insurance and contingency planning to help African countries hit by severe drought translate an ARC payout into effective and timely responses to assist those affected.

Waiting for money to buy aid, and then getting it to people who need it quickly, have always been challenges for the WFP. But drought is a slow-onset event and its impact on people takes time to become visible, so raising money to respond has been even more problematic.

''Early action can lead to direct cost savings on commodities and logistics, and prevent dislocation in markets. Evidence suggests the savings that result from early action could be significant''

The famine in Somalia in 2010/11 is an example. The agency had rung the alarm bells early but it took the declaration of famine and images of starving children to get money flowing in, and putting aid in place then was expensive because it had to be done quickly.

"Early action can lead to direct cost savings on commodities and logistics, and prevent dislocation in markets," said Shadreck Mapfumo, Head of Risk Management and Capacity Building at ARC. "Evidence suggests the savings that result from early action could be significant," he told a recent workshop for African countries in Johannesburg. The ARC said they have done some evaluations and will be sharing these in due course.

How it works

WFP has developed software called Africa Risk View (ARV) to define the payout rules. The package takes the 10-day rainfall estimates from the US government's National Atmospheric Administration (NOAA) and uses them to plot a drought graph. "Measuring total rainfall at the end of a season has proven to be too crude an indicator for estimating the potential impact of rainfall deficits on production and livelihoods," said Syroka.

ARV then uses the Water Requirement Satisfaction Index (WRSI), which monitors water deficits throughout the growing season, and captures the impact of the timing, amount and distribution of rainfall on annual rain-fed staple crops and pasture. "Although a simple index, it is used by many national meteorological offices across Africa to monitor rainfall seasons and their impact on agriculture, and is the basis of many drought early warning tools for the continent," she noted.

The resulting drought index is applied to vulnerable populations - identified in household surveys - that depend on rainfall. The "ARV then uses this information to estimate how many people may be directly affected, or have been affected, by drought or deficit rainfall in a given season. Using cost-per-affected-person numbers as a final step, ARV estimates how much response costs to the observed drought event may be," Syroka said.

The software tool can be customized by each country to define drought events, as modelled by ARV, for which they would want a payout from ARC, and the size of the payout, which is made at the end of the season. Information from the software will calculate the size of the premium to be paid.

Sitting on the fence

Countries have yet to sign up to this African Union (AU) initiative. Some have valid concerns. Malawi deals with chronic drought in at least two of its regions nearly every year. "The question is, 'Should we put our money into hefty premiums when we know we will not get the money to respond to the crisis in these two regions every year, or rather spend that money on safety nets in the two regions?'" a Malawi representative said at the workshop in Johannesburg.

Kenya says it needs an insurance scheme that can pay out for multiple natural disasters. Mary Mwale from Kenya's National Drought Management Authority noted that in any given year her country could be dealing with a chronic drought in the north and floods in other regions, or even drought and flood in the same region simultaneously.


Photo: Jaspreet Kindra/IRIN
Carcasses dot the sandy landscape in Mauritania's Hodh El Chargui region in the south

Fatima Kassam, chief of government affairs and policy at the ARC and advisor to the AU Commissioner for Rural Economy and Agriculture, said they were talking to countries about developing a package that could suit them, and hoped to expand their coverage to other natural disasters in the future. She said 18 countries have expressed interest in signing up.

To the make the ARC effective, it needs a diverse portfolio to reduce risk, which will keep the premium down, Kassam explained. For example, if all the countries in the Sahel - who share exposure to similar climatic conditions - were to sign up, the premium would be high and payouts low. If other countries, with different risks, signed up, more money from premiums would be available to cover payouts.

Steve Wiggins, research fellow at the Overseas Development Institute (ODI), a UK-based think-tank, said the ARC was "like governments running their own insurance scheme", with the advantage that they would not have to pay for the services of the insurance industry, and could be flexible in operation and use of the fund - although too much discretion would undermine the scheme.

"I guess one of the advantages of formal schemes such as ARC is that they take away the scope for local discretion, and introduce reliability in political contexts where public action is often highly discretionary and arbitrary."

Some officials, like Joseph Kanyanga, Zambia's chief meteorologist, are concerned about what influence regional politics might have if the ARC is housed in the AU. "We would like it to be totally independent of the AU, as it could perhaps influence the amount of payouts made when and to whom."

AU advisor Kassam says the ARC is based on hard, parametric triggers.

"There will be no discretion at the time of payout", which means that payouts will be made based on facts and not influenced by any other factors. ARC will be a specialized agency of the AU - a financial subsidiary independent of any political influence. The details of the relationship between the ARC and the national legislation of member countries are yet to be worked out.

Alternatives

"[The ARC] provides an alternate route to manage drought-related disasters besides the UN-mediated Consolidated Appeals Process," said Christopher Barrett, a food expert who teaches development economics at Cornell University in the US.

"But it is equally important to recognize the limitations of these sorts of products. They insure against low rainfall over a particular period and space - low rainfall is imperfectly correlated with crop yields, income shortfalls, loss of key productive assets, livelihoods crises and the magnitude of a humanitarian emergency, if any."

Both Barrett and the ODI's Wiggins said the ARC should not be seen as a "silver bullet", and countries should not lose sight of other options. Wiggins said one such option was to consider an offshore account earning interest, which would be used to import maize in poor rainfall years, and pay the difference between the landed cost of maize, usually US$100 a ton or more than the typical local wholesale price.

"The offshore fund would be built up by the country setting aside the funds in the good years," Wiggins said. He proposed this option for inland countries in Southern Africa in 2004, where crops failed at least twice in a decade.

Climate change

Drought events that occurred once in 10 years could soon become more frequent, said Koko Warner, head of environmental migration, social vulnerability and adaptation at the UN University in Bonn. Insurance schemes like the ARC, which at present provide answers for short-term climate variability, need to factor in the impact of long-term climate change.

"We need to start taking action now to design safety nets and risk reduction schemes that will be able to respond to extreme and intense events, which could perhaps be occurring almost every other year in the not too distant future."

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