While African countries are taking action to better manage today’s weather, through participating in the African Risk Capacity (ARC) and its sovereign natural disaster insurance pool for example, significant additional investments will be required to offset the predicted negative impacts of Africa’s future climate and, at the very least, maintain the current status quo where insurance, together with other risk management and mitigation measures, can be a financially effective tool for managing weather risks. The capital required for such climate change adaptation investment in Africa is substantial; however, funds have not been forthcoming at the scale required.
To leverage and diversify available international funding, support countries’ own investments in resilience and adaptation, and protect its own value proposition to member states, ARC is developing a new financial mechanism called the Extreme Climate Facility, or XCF. The XCF will provide eligible countries – those already managing their weather risks through ARC – with additional funds should extreme weather events in their region increase in magnitude and/or frequency, as reflected by an objective index.
Requested by ARC Member States and announced by ARC Governing Board Chair Dr. Ngozi Okonjo-Iweala at the UN Climate Summit in New York on 23 September 2014, the XCF will be a data-driven, multi-year vehicle that will provide financial support to eligible African countries to help them build climate resilience and be financially prepared to undertake greater adaptation measures, should extreme weather event frequency and intensity increase in their region.
Building on ARC’s strengths and expertise in risk transfer as an African sovereign risk pooling mechanism, XCF will be specifically designed to access private capital in order to help Member States secure additional funds should climate volatility increase in Africa. As a basic pre-requisite for eligibility to participate in XCF, and therefore to receive such additional funds should they become available, a country must be in good standing with both ARC Agency and ARC Ltd and be a premium paying member of the ARC Ltd insurance pool. Similar to ARC insurance products, ARC Member States will use XCF payouts, if triggered, to boost climate adaptation plans and build resilience to the increasing risks.
XCF transactions will likely be structured as a series of five year financing windows, with payouts occurring to eligible countries at the end of five years if there has been a significant increase in extreme weather event activity compared to a baseline period. At the beginning of each financing window, the first of which is scheduled to start in 2018 or later, the financial risk of XCF triggering funds will be transferred to the international risk markets.