Droughts and floods have had the most significant humanitarian impact in Africa in recent decades. According to the World Meteorological Association, drought-related hazards in the last 50 years have left half a million people dead and resulted in economic losses amounting to $70 billion. Over 1 000 flood-related disasters claimed more than 20 000 lives during this period.
Contributing factors to flood risk are climate change, rapid urbanisation, poor urban development and infrastructure, and overpopulation. As the impacts of climate change accelerate in frequency and severity, on a continent that has contributed the least to CO2 emissions, the need to protect the most vulnerable has never been greater.
This is where insurance against natural disasters has an important role to play, however, in Africa, the uptake has been much too slow – only 3% of losses caused by natural disasters have coverage. Additionally, only 13 countries out of 54 have become signed up for the ARC Treaty and become member states.
Since its inception in 2014, ARC Ltd. has offered parametric insurance to member states in Africa for drought and tropical cyclones. However, product innovation and diversification have become critical to expanding insurance coverage on the continent and attaining the company’s goal of 200 million people annually by 2025. Diversifying will help ARC Ltd. address individual countries’ climate financing and mitigation needs. To this end, the company has been working with several African governments to run pilot projects for additional products, such as flood risk.
A new flood risk insurance product
Some member states have national and regional flood early-warning systems, but economic loss estimation to underpin a sovereign insurance scheme is lacking. To address this, ARC partnered with JBA Risk Management to devise a probability approach that would support a customisable parametric flood insurance product. Pilots were run in Côte d’Ivoire, Ghana, The Gambia and Togo, while Malawi is currently piloting the flood risk product, and providing historical data and patterns, enabling ARC Ltd. to customise the risk model for the country. Having such a model will assist the Malawian government in making informed decisions about flood risks and identifying flood-prone districts where disaster coverage is needed.
In November 2022, a technical advisory committee of senior flood experts from global institutions assessed the ARC flood risk model. It acknowledged that despite the level of difficulty, it was “reasonably robust and efficient in terms of describing the risks associated with flood events”. The ARC flood risk model was deemed ready for underwriting flood insurance policies, and ARC Ltd. earmarked early 2023 for the launch.
Flood risk cover for Lagos State, Nigeria
For Lagos State, floods continue to be a growing disaster risk due to several factors, including climate change and urbanisation. This has led to ecosystem depletion, pollution, inadequate drainage systems and the prevalence of poor and vulnerable communities. In the last decade, there has been a significant increase in the frequency of such events – 7.7 million people were affected, and assets worth over $9.5 billion were destroyed in 2012. Following heavy rain that began in early August 2022, Lagos State experienced flash floods and infrastructure collapse. A month later, floods across Nigeria were said to be the worst in a decade.
Impacting 34 of 36 states, including Lagos State, the floods claimed more than 600 lives, and 1.4 million people were displaced.
Compounding the socio-economic devastation of the loss of lives and livelihoods, the risk to food security when agricultural land is destroyed, and the damage to roads, property and infrastructure, is the fact that flood risk insurance does not play a significant mitigating role. Only multinational corporations, companies, and a few real estate owners have been signing up for coverage. This led to the launch of a sub-sovereign risk transfer scheme for Lagos State in November 2022. Intended to reach 8.5 million people by 2025, the €1.6 million project centres around a parametric insurance solution to be incorporated into Lagos State’s flood-risk-management framework.
ARC Ltd. is among the strategic partners in this project led by the Insurance Development Forum, AXA Climate and Swiss Re and supported by the United Nations Development Programme. Other partners are AXA Mansard, the Nigerian entity of the AXA Group, Finnish microsatellite manufacturer and flood data provider, ICEYE, and JBA Risk Management, who are flood data specialists. The project seeks to compile and analyse flood risk data to create a customised insurance product, enable the mapping of vulnerability zones and help improve contingency planning and resilience in Lagos State.
In the event of a flood, the parametric solution will pay out a pre-determined amount depending on the magnitude of the flood. As the policy provider, ARC Ltd.’s role will be to disburse these funds to the Lagos Ministry of Finance. Such payouts are often within days, allowing the government to deploy rapid emergency relief, direct cash transfers to affected households, and begin with infrastructure repairs.
The InsuResilience Solutions Fund, funded by the KfW Development Bank on behalf of the German Federal Ministry for Economic Cooperation and Development, is providing the capital for the project, together with IDF insurance industry members.