Risk Pool Intro
ARC will enable African countries to secure contingency funds for drought events by capitalising on the natural diversification of weather risk across the continent through a risk pool. A risk pool is a mechanism where individual risks are transferred and combined. That pool then takes on the risk profile of the group rather than the risk profile of each individual country, combining the uncertainty of individual risks into a calculable risk for the group.
By looking at the probability that an event will occur in a year, the correlation of risks, and the likelihood that a drought event will happen at multiple countries in the same year, it is possible to determine the probability of payouts for the entire pool and therefore the funds required to service those payouts. As ARC will cover up to nine discrete rainfall seasons across Africa, a continental risk pool's exposure to covariant drought risk would be significantly smaller than a given country's or region's exposure. Therefore, the sum of the annual contingent funds each country would need to have in reserve in order to be able to respond to an extreme drought emergency is substantially greater than the contingency funds required by a group of countries to respond to its worst case scenario.
MOU Regarding the ARC In-Country Capacity Building Programme
Prior to joining the ARC risk pool, countries work collaboratively with the ARC Secretariat in an intensive capacity building programme to prepare in-country government staff for the prospect of risk transfer to the international market. Countries formalize their engagement with the ARC Agency by signing a Memorandum of Understanding (MoU), which commit resources both from the ARC Agency and the government to undertake the capacity development programme. This support includes the secondment of government staff to carry out ARC activities including,
- The refinement of and training on Africa RiskView software to accurately reflect the drought-related food security events in the country;
- The quantification of the country's drought risk and selection of appropriate tools for the different layers of the risk transfer model, including risk transfer parameters for ARC;
- The drafting of operations plans for optimal use of a potential ARC Ltd payout; and,
- The commitment of premium payment.
Following this In-Country Capacity Development Phase, countries apply for a Certificate of Good Standing from the ARC Agency Governing Board. These certificates reflect a country's ability to link ARC Ltd payouts to time-sensitive, livelihood-saving and cost effective operations plans.