Non-insured losses on the African continent are close to 97%, which means, at best, only 3% of losses caused by drought, floods and tropical cyclones have been insured.
These figures reveal the massive quantum of the gap. The need for insurance cover against natural disasters is, however, becoming better understood.
We’re in a period of disasters, and it’s no surprise that disaster-risk financing is gaining recognition for its ability to build resilience to external shocks, which can have multi-generational effects.
Adam Cotter, Senior Vice President of DZ BANK
The issuer of the bond acts as an intermediary between the party that wants insurance, and the providers of that risk coverage.
The insured party pays premiums, those premiums get mixed in with the funding costs of the issuer, coupons are issued to the risk takers and, if no trigger events occur, at maturity investors get their money back. In this case, the insurance kicks in and the intermediary uses a portion of the bond to pay the insured parties.
The World Bank has to date issued about $3.6 billion in cat bonds, in categories from hurricanes and tropical cyclones to tropical cyclone- induced flooding, tsunamis and pandemics. But could more risks could be covered, perhaps even cyber terrorism?
So far, we’ve only scratched the surface with 20-odd transactions. We’re very excited about the potential in this area. ARC is Africa’s first sovereign risk pool, set up to combat the threat of climate-related disasters – mainly drought.
In essence, ARC help member states to better plan, prepare and respond to disasters… and they are tasked with specifying how they’ll spend any payouts received.
Since 2014, ARC has provided nearly $1 billion in cover, mainly for drought but also other risks, to more than 15 countries. And, as of the end of May, it is on course to make payouts of over $120 million to more than 10 countries and their designated humanitarian agencies.
The African continent is going to bear the brunt of the impact of global warming – and any future pandemics. So, there’s a role for insurance, and other tools, in closing the massive protection gap.
The purpose comes first – using risk finance as an instrument to address global challenges. That risk is massive in the world (climate risk, disaster risk) and there is massive capital chasing returns based on that risk.
