Promoting resilience through reinsurance: interview with Lars Thunell, chairman of African Risk Capacity

24th May 2017 Jack Aldane

At the African Development Bank meetings in Ahmedabad India, Jack Aldane spoke to Lars Thunell, former CEO of the International Finance Corporation and now chairman of African Risk Capacity Insurance Company Limited, about what insurance firms can do for countries that are most vulnerable to climate change and why digital infrastructure promises to be a game changer in Africa.

How have you been applying insurance and reinsurance as a tool for development?

The underlying methodology of African Risk Capacity (ARC) is to look at satellite weather data in a certain region to measure the frequency of rain, cyclones or flooding, and we create indices that store historical data going back as many years as possible. From this you can calculate the probabilities of drought, because you’ve connected the data to what has actually happened on the ground. Then you need another set of data, called vulnerability data, which tells you the affect of that drought. If you combine the two sets, you can get to a number in terms of dollars to fix the damage. As this becomes more consistent and effective, each country can look at the data themselves. ARC is a mutual insurance company, so its owned by the policyholders, effectively. They insure themselves, and if we have a predetermined limit based on a definition of a problem such as drought, they can select effectively how to do it; whether to insure for one year, or five years or even ten years, based on probable vulnerability.

Agriculture and food security in Africa have been consistent themes throughout the course of the meetings here in India. How does the work you do to mitigate the risks posed by climate change translate to the immediate needs of African farmers?

A couple of years ago in West Africa we helped around 1.3 million people by paying out for disaster relief in the form of seeds for farmers, as well as food for livestocks. We’ve since done a study on the people who received those benefits and we found that this helped 40 percent of the farmers to stay on their farm. One of the worst things that happens after a natural disaster is that farmers are forced to leave their farms and migrate to the city, which goes straight to the cause of the refugee problem. This was an effective way of allowing people to stay being what they are in a time of need. One of the things you have to figure out is what kind of crops are being used by the farmers. There was a bit of a hiccup in Malawi last year because the government thought that the farmers were producing one type of maize when in reality they had produced another. They had planted short-cycle maize, which is normally very resilient over the season, but if a drought occurs at the wrong time, it becomes very vulnerable.

What must a developing country do before it can insure itself?

Any country has to develop a contingency plan, first and foremost. In other words, what does it do when something happens – how will they access the money to attend to its impact? Most countries don’t have a natural disaster plan, and any plan first needs to go under review and be okayed, so this is a capacity issue which goes beyond insurance. If you compare this programme to CCRIF, which is similar programme in the Caribbean, they don’t have this aspect. We’ve added this to reinsurance, and of course it helps to minimise corruption.

How do you take on the omnipresent problem in development finance of taking these projects to scale?

Well, I would say we work towards this at three levels. One is public awareness, social media, what have you. The second is working within the African Union, of which the ARC is after all an entity. Thirdly, we talk to the various countries we work with about the benefits of insurance. We started with countries in West Africa. This year we’re adding Chad, and building up more trust between ourselves and African states. However, I think that if you are a finance minister with already tight budgets, paying premiums is tough. That’s why we’re working now with the African Union and the African Development Bank, from whom we’re trying to get at least part of the premium funded in order to taper it off over time.

You were at IFC: what role do development finance institutions have in reinsurance?

We’re having similar discussions to those we’ve had with AfDB with DfID and KfW. Together DfID and KfW, on behalf of BMZ, have committed about US$200 million and paid in about US$100 million. That is a capital loan of 20 years without interest, which we will have to pay back in 20 years. Part of the loan is a gift or grant, the other part is a true loan. We’re also looking into working with the World Food Programme. The idea they have is to double up on the insurance taken out by another party, so they get twice as much insurance for the same amount of money. That’s a programme we call ‘Replica’, since its about replicating the insurance.

What about healthcare? Is ARC moving towards this area?

Once our volumes are bigger, we’ll access the markets directly through a CAT bond, which is an instrument widely used already. As we move further away from singular year insurance to several year insurance, which I think will happen, then CAT bonds will be more important. During the Ebola outbreak, we initiated a research project within ARC where we changed the mandate of the African Union to include medical problems. We have no firm plans right now but we could issue a policy for this area. It would certainly complement what the World Bank is doing. Again, it comes down to countries having contingency plans. In the case of Ebola, a lot people just didn’t have any plan whatever.

Public-private partnerships (PPPs) can be difficult to achieve because there are so many misaligned interests and knowledge gaps between the parties. What do you feel most needs to be addressed to put PPPs on a path to success?

I think a lot of countries just don’t have the regulatory frameworks for PPP. Then you need to coordinate all the ministries and the private sector, and account for cultural differences that will arise also. Everyone always thinks the other side is going to take all the risks. The good news for Africa right now though is the technological revolution taking place. You’re going to find much more of a distributed system where there is Internet for all and farmers getting market prices via their phones. I think that, to a large extent, we’re going to move away from the big power projects and into distributed solar-powered mini grids. That way, you don’t really need government. You can just have entrepreneurs.

Dr. Thunell is a member of a high-level panel for strategy at the African Development Bank and holds the position of senior advisor to the Blackstone Group. He is formerly the chairman of Global Water Development Partners and was both a board member and chair of the risk committee at Standard Chartered Bank and a board member of Kosmos Energy.

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