February 18, 2014

Commentary - Managing Risk at All Levels

By Dr. Joanna Syroka
Dr. Joanna Syroka joined ARC at its inception in 2009, and is currently the Programme Director of the
ARC Secretariat. She oversaw the overall work programme of the ARC design phase and is now in charge of all the technical and R&D work of the ARC Secretariat. A native of the UK, Joanna holds her Bachelors in Physics and PhD in Atmospheric Physics from Imperial College in London.

The development of products tailored to address the risk management needs of African smallholder farmers has received a lot of attention in recent years. Instruments such as index-based weather insurance have been identified as potentially important tools in a smallholder’s risk management toolbox. There are many exciting ongoing initiatives seeking to find scalable and sustainable methods for delivering such products—together with other much-needed financial services. However, recent events, such as the 2010/11 drought in the Horn of Africa, serve to remind us that it is not only smallholders that should be the focus for investment in, and innovation towards, better risk management, but also the governments and the international community who are called upon to support these farmers and their vulnerable neighbours in times of crisis. 

In Kenya for example, despite early warnings, events in late 2010 and early 2011 saw two consecutive rainfall seasons fail before a national emergency was declared and international financial resources arrived to support the government and its partners in assisting the drought-stricken communities. In the meantime, livelihoods—and in some cases lives—were lost, household assets were depleted, and malnutrition rates soared as communities were left to cope with the impact of drought alone. Although there were many complex factors at play that led to the delayed response in 2011, had the Kenyan government had access to index-based drought insurance that year, it is conceivable that events could have played out differently. Given the severity of the drought, Kenya would have received insurance payouts in February and June 2011, following the poor short and long rains respectively, reducing uncertainty about funding and the need to reallocate resources from other important programmes. Had the early payouts been used to respond to those affected before they started taking negative coping actions, it is likely that, at the very least, international assistance to support the government would have been mobilised sooner; at the very best, a humanitarian crisis could have been averted.

Events in Kenya coincided with the start of the African Union (AU) Commission’s African Risk Capacity (ARC) initiative, designed with support from the World Food Programme (WFP), to help AU member states resist and recover from the ravages of drought by creating an index-based weather insurance and early response mechanism. With its unique two-entity structure—ARC is composed of ARC Agency, a Specialized Agency of the AU to oversee the operations and facilitate intergovernmental capacity building, and ARC Insurance Company Ltd, a mutual insurance company established in Bermuda to carry to out ARC’s insurance functions—ARC brings together three critical elements: early warning, insurance, and contingency planning.

ARC will use satellite weather surveillance software to estimate needs and trigger insurance payouts to participating countries hit by severe drought. Developing a contingency plan for the use of a payout—demonstrating how it will be used to reach those affected before livelihoods are lost—will also be a prerequisite for participation. Evidence suggests that the economic benefits of early assistance to households after a failed harvest, before they deplete their productive assets and start skipping meals, far outweigh the insurance premiums countries would have to pay if they act together and pool their risk.

Three years on, Kenya is poised to join five other countries, Malawi, Mauritania, Mozambique, Niger, and Senegal as ARC’s first insurance pool in 2014. But how can an initiative like ARC, which aims to reach up to 20 countries seeking to manage their drought and flood risk in the next five years, help smallholders looking to access insurance and other financial services? By transferring the burden of weather risk away from governments, ARC aims to protect investments and accumulated assets at the ground level while promoting fiscal stability through the prevention of budget dislocations in times of disaster. Rather than supporting costly humanitarian interventions, the risk pooling mechanism should create space for governments and donors to back programmes that focus on long-term growth and encourage private sector investment. It will take risk management at all levels to attract the investments and innovations required to contribute to the economic growth of smallholder farmers in Africa. By helping governments move from managing crises to managing risks and to build resilience among vulnerable populations, ARC fills a critical part of the risk management spectrum for the African continent.

About

The Global Food and Agriculture Program aims to inform the development of US policy on global agricultural development and food security by raising awareness and providing resources, information, and policy analysis to the US Administration, Congress, and interested experts and organizations.

The Global Food and Agriculture Program is housed within the Chicago Council on Global Affairs, an independent, nonpartisan organization that provides insight – and influences the public discourse – on critical global issues. The Council on Global Affairs convenes leading global voices and conducts independent research to bring clarity and offer solutions to challenges and opportunities across the globe. The Council is committed to engaging the public and raising global awareness of issues that transcend borders and transform how people, business, and governments engage the world.

Support for the Global Food and Agriculture Program is generously provided by the Bill & Melinda Gates Foundation.

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