How innovative disaster risk financing can help Africa tackle impacts of climate change

The recent Intergovernmental Panel on Climate Change (IPCC) report has revealed a chilling forecast for Africa about the inevitability of more frequent and severe climate extremes, such as droughts, floods, and heatwaves, resulting in crop failures, food insecurity and the displacement of populations.

The report explains that "with every increment of global warming, regional changes in mean climate and extremes become more widespread and pronounced".

On reaching 1.5°C global warming, "precipitation and flooding events are projected to intensify and become more frequent in most regions in Africa", and should global warming rise to 2°C or above, this would result in the intensification of tropical cyclones.

Several African countries experience more than one type of climate-change-induced peril, sometimes even in the same year – Madagascar was devastated by five storms and tropical cyclones, as well as a drought, in 2022.

Djibouti in the Horn of Africa also bears the brunt of several perils. Among the most water-scarce countries in the world, with an average annual rainfall of only 130mm, it lacks permanent rivers, streams or freshwater sources and – like other countries in the region – is experiencing increasingly arid conditions and rising sea levels due to climate change.

Unpredictable rainfall has resulted in Djibouti also being exposed to the opposite extreme – intense precipitation events causing flash floods and mudslides, exacerbated by the landscape.

The country also experiences oceanic floods and humanitarian group the Djibouti Red Crescent Society estimates that some 30,000 people are adversely affected by floods every year.

As African nations remain vulnerable to climate change and battle to build resilience against perils, "without rapid, deep and sustained mitigation and accelerated adaptation actions, losses and damages will continue to increase, including projected adverse impacts in Africa", cautions the IPCC report.

Africa's climate finance gap means that in the event of a climate shock, governments are forced to reallocate already constrained budgets from other essential areas, such as education and healthcare – or depend on traditional humanitarian aid, which is severely underfunded and not immediately available. A critical need exists for the support of developed countries and for innovative disaster risk finance products.

The value of partnerships in this regard cannot be stressed enough. Increased cooperation by pooling technical skills, resources and funds, improves and mobilizes access to finance while facilitating contingency planning before a natural disaster and thereafter, a rapid, impactful emergency response, saving more lives and livelihoods.

A partnership example is the recent first-ever, multi-year, multi-peril agreement on the African continent, which extends disaster insurance coverage to Djibouti. It is an agreement between the Djibouti Government, African Risk Capacity Group (ARC), Descartes Insurance and the World Bank, forming part of the latter's De-Risking, Inclusion and value Enhancement of Pastoral Economies (DRIVE) Project aimed at protecting pastoralists from the impact of climate change in the Horn of Africa.

The terms of the agreement give Djibouti access to five years of disaster risk management, capacity building and disaster risk insurance coverage for its two main perils – drought and excess precipitation. The perils will trigger rapid payouts, providing the government with much-needed cash flow to drive its emergency response and reach the most vulnerable of communities without delay.

The World Bank and the Global Risk Financing Facility multi-donor fund provided $2 million to underwrite the insurance policy, underscoring their support of innovative financial instruments, such as insurance, to help at-risk countries become more climate change resilient.

ARC has built a strong network of partners over the years to develop solutions tailored to the needs of stakeholders in its member states. One such partner is Descartes Underwriting, which has worked closely with ARC on the continent, including in Madagascar last year around tropical cyclone Batsirai.

The excess precipitation component of the cover focuses on Djibouti City, where 60% of the country's population lives. Due to this population density, the city's topography and its coastal location, residents are highly vulnerable to extreme rainfall.

For ARC Ltd., a hybrid mutual insurer and financial affiliate of the ARC Group, not only is the multi-year, multi-peril agreement ground-breaking in Africa, but it is also the first time the company is covering excess precipitation.

ARC Ltd. also built two unique, innovative risk products for Djibouti in a record time of six months, setting a precedent that it hopes to replicate throughout Africa to assist other countries fighting climate-change-induced multi-perils.

This also ties in with ARC Ltd.’s mission to expand disaster risk insurance across the continent to cover the estimated 200 million vulnerable people whose economic activities are severely disrupted by extreme weather.

As the first African country to sign up for the multi-year, multi-peril cover, Djibouti has demonstrated leadership on the continent in the domain of disaster risk management, while being proof of concept that disaster risk financing not only works, but is critical in Africa where the fallout from climate change disproportionately impacts the most vulnerable.