Cat Risk Pools for African Mega-Cities

With an opportunity to improve the protection of public finances and its citizens, some governments have turned to specialized resilience-building disaster risk financing (DRF) tools. One way to do it has been through the combination of parametric products, such as insurance and cat bonds, in a layered climate risk management (CRM) strategies through special vehicles called catastrophic risk pools. These mechanisms allow the diversification of regional sovereign risk, thus lowering the cost of insurance, while allowing governments to access predictable and timely funding for the immediate response to extreme weather events.

The most relevant examples of sovereign level catastrophic risk pools are the African Risk Capacity (ARC), the Caribbean Catastrophe Risk Insurance Facility (CCRIF), and the Pacific Catastrophe Risk Insurance Company (PCRIC, formerly known as PCRAFI). The three risk pools group 26 countries in three world regions with an annual coverage of USD 870 million and USD 105 million in payouts (WB, n.d.). This month, a World Bank initiative is expected to present a fourth cat risk pool to the group, the South East Asia Disaster Risk Insurance Facility (SEADRIF).

These risk pools are multi-donor-sponsored initiatives at the macro level that cover primarily hydro-metereological hazards such as hurricanes, tropical storms, or droughts, but also earthquakes. They provide coverage where other forms of disaster financing or insurance penetration are low or nonexistent among low-income and vulnerable populations.

The African Risk Capacity (ARC), for example, is a specialized state-level agency of the African Union providing disaster risk financing solutions to its member states particularly in risks that affect their agriculture (e.g. droughts, floods and cyclones). For a member country to participate in the risk pool, ARC (2017) mandates countries to undertake several processes, including:

1. customizing its risk modelling software (Africa RiskView)

2. signing a memorandum of understanding that commits capacity development resources from both, ARC and the government

3. defining a contingency and operations plan for the optimal and safe use of funds from payouts

4. determining risk transfer parameters, such as total coverage, and the amounts of to retain and cede to the risk pool.

The World Bank suggests that four principles should be met in a DRF solution:

1. timeliness of funding

2. disbursement of funds

3. disaster risk layering

4. data and analytics

With an African-based working model of risk-pooling at a macro level, can it be possible to risk-pool urban disaster risk? What are the data limitations that hinder the development and pricing of an urban parametric DRF strategy for African mega-cities? How relevant are political, financial, socio-cultural, technological, legal, and environmental factors in those cities municipalities that can facilitate or not the implementation of DRF mechanism that includes parametric insurance products?

The Nigerian Resilient Cities Network (NRCN) have already taken action towards urban resiliency. Organizations like ARC or NRCN are vehicles through which urban risk pools can become a vehicle to enhance cities’ CRM policies while diversifying risk.

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