Cost-Benefit Analysis of the African Risk Capacity Facility

64 Pages Posted: 23 Oct 2013  

Daniel J. Clarke

Disaster Risk Financing and Insurance Program, World Bank,

Ruth Vargas Hill

World Bank

Date Written: September 2013

Abstract

Governments play a key role in supporting populations affected by natural disasters, including rebuilding infrastructure to ensure continued services and scaling-up public safety nets to prevent widespread hunger and poverty. However, the traditional approach of limiting greater spending to the aftermath of a disaster has many drawbacks. External support from bilateral or multilateral donors can be slow and unreliable. Private sector reinsurance can be prohibitively expensive. And reallocating budgets toward recovery and reconstruction is typically a slow process that can even hurt long-term development by drawing resources away from effective programs. Some countries are trying to mitigate this liability by banding together and creating sovereign catastrophe risk pools that allow governments to coordinate with one another to insure their uncertain fiscal liabilities at lower cost. Countries contribute to the pool, which then provides payments if an insured natural disaster strikes. The African Risk Capacity (ARC), has been proposed as a pan-Africa drought risk pool to insure against drought risk in Africa south of the Sahara. If fully operationalized, the ARC will mark a major change in how donors fund emergency support to countries in Africa during times of need. In this paper, we undertake a cost-benefit analysis of the ARC pool and discuss how lessons can inform the design of the ARC.

Keywords: Africa south of Sahara, Africa, drought, natural disasters, risk management, sovereign risk pools

Suggested Citation

Clarke, Daniel J. and Hill, Ruth Vargas, Cost-Benefit Analysis of the African Risk Capacity Facility (September 2013). IFPRI Discussion Paper 01292. Available at SSRN: https://ssrn.com/abstract=2343159 or http://dx.doi.org/10.2139/ssrn.2343159

Daniel J. Clarke (Contact Author)

Disaster Risk Financing and Insurance Program, World Bank, ( email )

Washington, DC 20433
United States

Ruth Vargas Hill

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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