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PARAMETRIC INSURANCE IN ACTION
Africa RiskView, a bespoke technical engine used by ARC interprets different types of weather data, including rainfall estimates and information about crops, such as soil and cropping calendars. This data is then converted into meaningful indicators for agricultural production and applied to vulnerable populations that depend on rainfall for crops and rangeland for their livelihoods. Africa RiskView then uses this information to estimate how many people may be affected by drought or deficit rainfall in a given season. At the end of 2015, ARC announced a plan to double its insurance offering through a replica coverage initiative which allows international organisations to take out ARC policies that match those already provided directly toAfrican governments, expanding participating countries’ coverage. More recently, in 2017, the World Bank developed the Pacific Catastrophic Risk Facility (PCRAFI), a risk insurance pool for five small Pacific islands. The project builds on shared experiences from the similar catastrophe risk pools in Africa and the Caribbean.
Mexico is a pioneer in the use of parametrics. In 1996, the Mexican government created a national fund for natural disasters — FONDEN — to which it transfers budgetary funds for disaster relief and reconstruction efforts. FONDEN uses various financial instruments to support local states and entities in responding to natural disasters, including reserve funds and risk transfer solutions. In 2006, FONDEN issued a USD 160 million catastrophe bond (called “CatMex”) to transfer Mexico’s earthquake risk to the international capital markets. It was the first parametric cat bond issued by a sovereign. African Risk Capacity (ARC) was launched by the African Union in 2014. Designed to provide an immediate financial payout to nation state members if there is a drought, the pool started with four countries as policyholders. In October 2017 Sudan joined the ARC bringing the total number of member countries to 22.
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