In the 1980s images of skeletal Ethiopian babies and their parents, dying from hunger during a devastating famine, helped galvanize global humanitarian and financial aid to drought-ravaged African countries.

Three decades and countless droughts later and the relief model Africa uses in response to natural disasters has hardly changed—until now.

On May 1, Africa launched its first sovereign risk pool insurance scheme, marking a major policy shift in the way climatic events such as droughts, and from next year floods, will be tackled by the world’s poorest continent.

The risk pool has the potential to save thousands of lives and billions of dollars, officials say.

At the moment, the system for responding to natural disasters can be cumbersome and inefficient, with farmers bearing the cost burden as livestock perish and crops fail.

In addition, international aid through appeals is secured mostly on a special purpose basis after disaster strikes, meaning valuable time is lost as African nations scramble to respond to crises.

With the African Risk Capacity (ARC) pool, a less reactionary approach is envisaged to forestall impending calamity. The fund offers early warnings from satellite-based rainfall data and promises to trigger speedy payouts to governments and communities hardest hit by severe dry spells.

Kenya, Mauritania, Senegal, Mozambique and Niger are the first five countries in the inaugural risk pool, which covers the rainfall seasons beginning this year.

“The creation of the first ever African catastrophe insurance pool is a transformative moment in our efforts to take ownership and use aid more effectively,” said Nigeria’s Finance Minister, Ngozi Okonjo-Iweala, in an ARC statement.

“It is an unprecedented way of organizing ourselves with our partners, with Africa taking the lead – taking our collective destiny into our own hands, rather than relying on the international community for bailouts,” said Okonjo-Iweala, who also serves as chairwoman of the ARC Agency Board.

Huge Growth Potential

A specialized African Union agency, which has a separate insurance company, ARC is initially providing $135 million of total coverage to the five African countries.

Significant fund growth is anticipated, both for the drought program and when flood insurancebecomes available, providing incentives for flood-prone countries including Nigeria, Burkina Faso and Benin to join.

“In the next five years we are aiming to have 20 plus countries belonging to the pool, covering three or more different perils and providing $500 million to a billion dollars in disaster response financing,” said ARC advisor Simon Young.

Agriculture is Africa’s backbone, employing almost three-quarters of the continent’s workforce, mainly women who engage in small-scale subsistence farming.

However, poor insurance penetration across the agricultural value chain, from massive commercial rose production in Ethiopia to smallholder farmers almost everywhere, mirrors a state of under-development bedeviling the sector.

In India, there are more than 30 million smallholder farmers out of a total of 120 million covered by insurance, while only an estimated 350,000 to 400,000 farmers in Africa have policies.

“There is huge potential in this area, especially as the industry gets much better at finding ways to deliver insurance at affordable prices,” said Christina Ulardic, head of Africa market development at Swiss Re Corporate Solutions.

Swiss Re is one of 12 top global reinsurers, including Munich Re and Hannover Re, who back the African risk pool and are seizing the opportunity to substantially expand into the continent’s agrarian sector.

Of the $135 million on risk, $55 million is provided via the international re-insurance market. The fund was established with a $200 million commitment from Germany and Britain, while donor pledges were also received from Sweden and the Rockefeller Foundation, among others.

Young said ARC provides a compelling platform for engagement with the private sector, enabling African countries to benefit from the value of global risk market access.

“It establishes a solid foundation for scaling up insurance penetration to build resilience at the national level all the way down to the individual farmer,” Young told Reuters.

How It Works

According to ARC analysis, a widespread catastrophic drought in sub-Saharan Africa today would cost upwards of $3 billion in emergency assistance, placing an “unprecedented” financial strain on African countries and donor countries’ aid budgets.

What the new system will do is provide funds to the most needy within 120 days.

So, for example, in East Africa’s largest economy Kenya, where drought is viewed as the single most important natural hazard and cost the $38 billion economy just over $12 billion between 2008 and 2011, additional payments would help distressed communities.

“ARC payouts will fund two specific activities: unconditional cash transfers and water interventions,” said Kenya’s drought operational plan submitted to ARC.

In the event of another drought in Kenya, the new system would kick in, allocating $22.5 million out of a total ARC payout of $30 million to more than 100,000 households.

It would augment a hunger safety net program that disburses cash transfers through biometric smart cards to impoverished households in Kenya’s four poorest counties.

ARC’s cost-benefit analysis estimates that spending one dollar on early intervention through ARC could reduce ultimate economic impact by as much as $4.50.