Climate disasters are happening three times more often now than 50 years ago. This new normal demands new solutions – and insurance could be the answer. When drought was predicted in Senegal in 2019, an innovative insurance initiative helped stop thousands of lives and livelihoods from being lost.
By 2050, 200 million people could be paying the price for climate change every year.
Save the Children and other non-governmental organisations (NGOs) have been responding to the impacts of climate change for years – distributing shelter kits to families who have lost their homes to floods, or repairing schools damaged by tropical storms. But is this reactive approach effective enough to tackle the climate crisis today? We know these disasters are going to happen – now more so than ever thanks to advances in forecasting – so why sit and wait for them to unfold before taking action?
“Funding is too slow, unreliable and costly.”
Part of the answer – more often than not – is money. Typically, humanitarian funding only becomes available once a state of emergency is declared. Drought for example is a slow-onset hazard. We can see it coming and know months in advance the damage that it could cause. Yet, its often not until it escalates into a devastating famine that donors start to engage, and the money starts to trickle in. By then, for many, it’s too late.
This traditional funding model is too slow, unreliable, and costly. With worst case projections estimating climate-related humanitarian costs will reach $20 billion per year by 2030, a new way of financing is desperately needed.
African Risk Capacity
The African Risk Capacity (ARC) is a specialised agency of the African Union which is taking significant steps to meet this need.
Despite contributing no more than 2-3% of greenhouse gas emissions, Africa is suffering disproportionately from climate change, causing rising levels of hunger, disease outbreaks, displacement and conflict.
ARC is helping countries across the continent to better plan, prepare, and respond to climate disasters. One of the ways they are doing this is through insurance financing.
How does it work?
Participating governments pay a premium with the assurance they will receive a payout when needed. It’s like home insurance in this sense. You buy a policy at the beginning of the year for £500. Your house floods. You receive a lump sum at a higher return of £10,000 to compensate for the loss and damage.
The difference with ARC’s product is that it is a parametric insurance product. This means that instead of paying out after the damage has happened, it makes a payment when pre-agreed parameters are met. The parameters for this product are linked to the prediction of extreme weather events – like monitoring rainfall data – meaning when the triggers are met, funds are accessible before a climate disaster becomes a humanitarian crisis and homes and livelihoods are lost.
Returning to the home insurance example again, instead of claiming compensation after the flood has damaged your home, you could receive the payout when the heavy rainfall is forecast a week before.
In 2018, NGOs and UN agencies gained access to this mechanism through the ARC Replica initiative.
This meant they could purchase an insurance policy that replicates a country’s government policy. So, when triggers are met, they receive a payout at the same time as the government. In 2019, the Start Network – a global network of NGOs, including Save the Children – purchased its first ARC Replica policy to protect against drought in Senegal, alongside the Senegalese government. Later that year, a payout was triggered.
Drought in Senegal
In November 2019, rainfall levels fell below the predefined thresholds in Senegal and drought was predicted, threatening nearly a million people. The Start Network automatically received $10.6m and the Government of Senegal another $12.5m. This is the largest-ever funding allocation to civil society for early humanitarian action. It was a monumental moment.
Malick Gueye’s harvest was decimated by the drought. “It was a catastrophe, nothing, absolutely nothing came out of the field […] Without a harvest, we can’t count on anything.”
With the $10.6m payout, Save the Children, alongside five other Start Network members, were able to get to work before the worst impacts of the drought were felt by families like Malick’s, who rely on rain-fed crops for their livelihood. Each agency covered a different region to distribute cash and fortified flour to more than 335,000 people. With the outbreak of Covid-19, the support was even more critical and was quickly adapted to mitigate the spread of the virus.
“The situation I was in before I received help from the project was unimaginable. […] What this help brought to us, only God can measure its positive effects.”
But did it work?
The timing of the support undoubtedly had a huge impact. In a survey, 86% of families said they received the cash early enough to prepare for the lean season. With this financial safety net, families are less likely to resort to damaging coping strategies – such as skipping meals, selling assets, or sending children to work instead of school. By the end of the lean season, the number of families going without food for a whole day dropped from 21% to 2%.
We know early action like this is also good value-for-money. There is a growing body of evidence that for every $1 spent on anticipatory action, $3 is spent on a reactive response. And with the cost of the 2019 premium coming in at $2.6m and the payout at $10.6m, donor’s money was multiplied and the return on investment was huge.
The final triumph of this pioneering initiative is in the name – Replica. This is a government-led initiative with NGOs like Save the Children, replicating and bolstering what African governments are already doing. With multiple governments pooling funds and spreading out their risk, they are growing the power and risk management portfolio of the whole continent. Our role is to complement and extend government support. It is a sound example of collaborative, sustainable and localised humanitarian action – three core principles that are crucial in the fight against the biggest humanitarian threat of today, and of tomorrow.
