How Drought Insurance Can Leave Millions Without Food

The villagers of Chilimani are hardened gamblers, praying that annual rain will bring life to scrubby fields and provide enough corn to fill their bellies a few times a week. But in a world of scrambled weather patterns, they can’t catch a break.

Floods ravaged this small Malawi village in 2022. Then came Freddy, a record-breaking cyclone, in early 2023. This year, the worst drought in decades obliterated the harvest of corn, the main food. On a recent afternoon, dazed and hungry children slumped under a shade-giving mango tree, while hens and skinny goats scrounged for feed. Not a single cornstalk had matured.

Though the villagers didn’t know it, they were partly protected by an unusual insurance policy paid for by their government and backed by large reinsurers a world away. Malawi received a payout after the drought reached a critical level. But as of early November, more than seven months after the country declared a state of disaster, scant aid had reached the farmers of Chilimani. Only a few families were receiving an allotment of maize, as corn is known here.

“It’s the worst time of our lives,” says Amina Kachere, a 37-year-old mother of five. “Everything has become unpredictable.”

The drought, driven by an El Niño weather cycle supercharged by climate change, has pushed 26 million people in southern Africa to the brink of starvation. Maize plants don’t mature if they lack water at a key time in the growing cycle, making the communities that depend on the crop vulnerable to a warming world.

Malawi and the rest of Africa, which have contributed virtually nothing to the greenhouse gas emissions causing Earth’s temperature to rise, have for decades asked the rich world to compensate them for the crippling toll of disasters on their economies, to little avail. As wealthy nations have struggled to cobble together a long-promised relief fund, there’s been a push to use insurance to transfer more developing-country climate risk to international capital markets to reduce the burden on donor states. That same impulse drove the outcome of November’s COP29 climate summit, which ended with developed economies once again turning to private markets to supply the bulk of money sought by poor countries to help them deal with global warming.

“Rich countries don’t want to be on the hook for hundreds of billions of dollars a year,” says Nicholas Bernards, a political economist at the University of Warwick who has researched insurance programs in Africa. “A system based on insurance means much less cost and exposure for them.”

Insurance as a risk management tool may be old hat in the West, but it’s a novel concept for millions of people in Asia, Africa and the Caribbean who increasingly — and often unknowingly — are being swept into its fold. And it’s a niche and chancy form of insurance that’s gaining ground in these regions.

In a traditional contract, a policyholder pays a premium and makes a claim based on the real-world damage suffered. Malawi’s policy, known as parametric insurance, works differently. The amount of the payout is agreed in advance, and it is only made when a specific metric is triggered. For example, in drought conditions, the parameter could be a dangerously low level of rainfall that causes a vital food crop to fail. Missing the threshold by a hair can mean no payout at all — even if losses are substantial.

That’s raised concerns that vulnerable populations are being forced to rely on what Satya Beekarry, a partner at PKF Littlejohn, an accounting firm that audits parametric deals, calls “a gambling contract” in lieu of direct climate compensation. Malawi seemingly won its bet when the drought got severe enough to trigger its policy. But the rules of the global insurance market still govern the outcome. Payouts are determined by the premium the policyholder can afford. And the money received through Malawi’s insurance has brought only slight relief to Chilimani and other villages in one of the world’s poorest countries, home to 20 million.

Parametric insurance is designed to deliver quick payouts, since claims adjustors aren’t required to tally actual damage. That can kickstart recovery while governments wait for other funds to come through. But John Anderson, a senior economist at the World Bank, which backs the use of parametric tools, says insurance has to be combined with other measures to build long-term resilience against future shocks.

“We can’t just insure ourselves out of the impact of climate change,” he says.

A parametric insurance program in the Caribbean has disbursed about $390 million for hurricanes, excess rainfall and earthquakes since 2007. Similar efforts are gaining ground in China and India. Swiss Re AG expects the global market for parametric insurance to reach $29 billion by 2031.

The most ambitious plan is being rolled out in Africa, which loses up to 15% of its gross domestic product per capita to climate shocks every year. The African Union, a club of 54 nations, wants parametric coverage to reach 700 million people, about half its total population, over the next decade. The bloc’s project, African Risk Capacity (ARC), has covered 135 million Africans since it started, including 23 million last year.

In addition to fast payouts, ARC says it provides transparency, certainty and a flexible way of managing climate risk that promotes resilience. Some countries are big believers.

Zimbabwe, which hasn’t paid its arrears on $21 billion of debt since 1999, can’t borrow from multilateral lenders like the World Bank, while deeply indebted African nations such as Zambia struggle to borrow from global markets. For them, parametric insurance is a lifeline.

Mthuli Ncube, Zimbabwe’s finance minister, calls ARC “a fantastic program.” The country received a $32 million drought payment this year after its corn crop declined by 70%. “We are now signing up to do it next year again, and we want to expand it to cover the entire country,” Ncube says. Cissy Kabasuuga, the World Food Programme’s country director for Zambia, has described ARC as “very effective” in providing early funding after disasters.

Proponents of the approach argue that speedy payouts justify rolling the dice against a pre-determined trigger. “It usually takes 18 months to mobilize [donor] money” for disaster recovery, says Lesley Ndlovu, the chief executive of ARC Ltd., the Bermuda-based insurance arm of the program. “We are aiming to pay within 10 days.”

Outcomes on the ground aren’t that clear cut, however. Some ARC payouts have come late — or not at all — because of disputed data. Kenya didn’t receive a drought payout over two successive periods and withdrew from the program after 2016. Some of the other 30 African countries that haven’t joined as paying members can’t afford the premiums, don’t like the odds or are unfamiliar with parametric triggers.

In Africa, where droughts and cyclones have intensified and floods have increased fivefold since the 1990s, at least $250 billion — a tenth of the continent’s GDP — needs to be mobilized to fight climate change each year, according to the European Investment Bank. That kind of firepower remains a distant dream. ARC has disbursed $213 million over the last decade, a modest contribution to closing the huge climate finance gap.

“Africa is in such a tight spot because the costs of recovering from extreme events is undermining any attempts at development,” says Guy Midgley, acting director of the School for Climate Studies at Stellenbosch University in South Africa.

ARC Ltd. launched in 2014 with support from the UK and Germany. The British government agreed to provide £100 million ($127 million) of capital over 20 years, with the expectation that African governments would pay a sizable chunk of premiums from their own budgets.

In order for ARC to be sustainable, many countries have to contribute premiums, but in any given year only a handful should receive payouts. Countries fix their own parameters based on local risk assessments. ARC uses that data to determine the premium and the payout level. It then backstops some of its risk by buying reinsurance from global firms such as Hiscox Ltd and Swiss Re. Most ARC policies are for severe droughts, though it now offers a cyclone product and is testing one for floods.

During a dry spell, ARC’s software uses weather models and satellite data to monitor the level of rainfall and crop impact. Of the four countries that made up ARC’s first risk pool from 2014 to 2015, Mauritania, Senegal and Niger received collective payouts of $26.3 million in the first year. That persuaded Malawi and three others to join in the second round. It was a promising start, but it didn’t last.

Malawi declared a state of disaster in April 2016 when a deadly drought made food scarce for more than 6 million people, yet there was no payout. ARC’s software indicated far lower numbers of drought-affected people compared to the actual impact. It turned out that ARC had input long-cycle maize in its model, even though many farmers had planted a short-cycle variety. An outcry ensued, and ARC members agreed to adjust the rules after the fact — changing the crop type to short cycle. Malawi was given a delayed payment of $8.1 million for a $4.7 million premium.

It was a stark demonstration of the pronounced basis risk of parametric products, which occurs when pre-determined triggers don’t match the actual loss suffered on the ground. That’s why it’s so crucial that the metrics have to be carefully tailored to each country’s specific risks. A similar problem required ARC to make a non-contractual payment of $2.4 million to Mauritania in 2018.

“Africa is diverse, and the technical customization” that’s needed to write each parametric policy “is quite intensive,” says Leigh Johnson, a geographer at the University of Oregon. “It’s often out of step with countries’ abilities.”

Johnson published a study in 2021 documenting 10 cases of ex gratia payments for parametric insurance in Africa. It indicated that the basis-risk problem was common, and that pre-agreed rules were rarely in place to help resolve such disputes. The pattern “cloaks the inadequacy of these models,” she says.

ARC’s technical engine is a piece of desktop software, called Africa RiskView, which monitors dry spells in close to real time. The drought model is fed with satellite data to estimate the number of people affected and the cost of responding. It also tries to capture the estimated impact of climate change, which can nudge up the price of premiums.

The program’s strong reliance on weather data can sometimes leave African countries disadvantaged because they don’t have as many weather stations, monitoring resources and historical data to create robust risk models.

Even satellite data can misfire. A rainfall dataset produced by the US National Oceanic and Atmospheric Administration and used by RiskView in 2021 resulted in a dispute when it didn’t tally with observations from other sources. Burkina Faso, Niger and Mauritania “felt that a payout was due and this situation took several months to resolve,” according to an independent assessment of ARC published by Oxford Policy Management, a consulting firm.

ARC stopped using that dataset and says it is confident that the current data and models are reliable. Yet weaknesses remain. For example, a satellite’s estimate of cloud cover — a proxy for rainfall — can suggest it’s raining even when it isn’t. “The most accurate data is what’s collected on the ground,” says Patrick Munyingi, an analyst at ARC. “But there aren’t enough ground stations in many African countries.”

After the long-cycle maize controversy, Kenya and Malawi pulled out of ARC in the 2016 to 2017 season and participation took a dive. Just three countries took part in 2018, with total coverage of only $34.3 million.

Participation revived after the introduction of ARC Replica, a parallel contract that allows humanitarian groups to partially or completely match a country policy. (When an NGO buys a replica policy, it pays its own premium and receives its own payout — which it can then use as disaster relief.) Agencies of the United Nations and other groups bought the mirror policies, and confidence returned.

In signing up to ARC’s policies, the governments and NGOs also agreed to subject themselves to a much larger force — profit-oriented market dynamics. For some critics, it’s jarring that poor countries are encouraged to use a financial tool that leaves them at the mercy of skyrocketing reinsurance rates.

To keep the program sustainable, the reinsurers have to earn more than they pay out. The US and European companies that service ARC made $91.6 million and paid $52.3 million in claims between 2014 and 2023. Participants include Liberty Mutual Group of the US, Hannover Re of Germany, Generali of Italy and Hiscox, currently lead reinsurer for Malawi. The reinsurers aren’t trying to exploit the program, says Panayotis Koulovasilopoulos, a senior underwriter at Hiscox. “What we’re trying to do is protect the most vulnerable countries and build out an ecosystem to do that.”

Like any insurer, ARC Ltd. also reinvests its capital in US Treasuries, corporate bonds and mutual funds, where it can get the best returns. Still, Bernards of the University of Warwick argues that all this can be seen as amounting to “a net transfer of aid money and the fiscal resources of developing countries back to financial markets in wealthy countries, in exchange for uncertain protection against climate hazards.”

Malawi spent $2.8 million on four policies for four regions, each with a different trigger level. As the dry spell intensified from January through April — the Southern Hemisphere’s summer — the government in Lilongwe, Malawi’s capital, waited for word from ARC.

“It was the critical period when maize needs rain,” says Fyawupi Mwafongo, Malawi’s deputy director for disaster response. “It means the cob can’t mature.”

All four policies triggered around May and the government received a $11.2 million check from ARC. Officials estimated that key sectors, including food and agriculture, needed $447 million in support. So far Malawi has mobilized $180 million from various sources, leaving a gap of $267 million.

Moses Chimphepo, Malawi’s director of preparedness and response, worries about future insurance payouts. “You can’t experiment with people’s lives,” he says in an interview in his Lilongwe office. “We need to look at the triggers” and make sure they’re fair.

In Salima, a hard-hit central district, corn production has halved compared to the previous year. Some farmers sold livestock and others hawked charcoal, which is illegal. A few tried to fish in nearby Lake Malawi. Families took children out of schools.

“It’s a real punch for us,” says Enford Kanyimbo, director of agriculture in the district, who blames a changing climate for the brutal conditions. “We are suffering for sins we didn’t commit.”

The calamity continued to unfold quietly a few miles away, in Chilimani, where only a trickle of funds had reached the village by November. Alongside mud-and-brick houses, the cornfields lay parched and empty. A local official, Edward Domingo, identified 13 of 300 families that would get a monthly corn quota of 50 kilograms (110 pounds). They were chosen based on need, using a five-year-old survey.

Halima Leonard, 42, a mother of five, wasn’t one of the lucky 13. The death of her husband the previous year wasn’t reflected in the census. Her family has survived by boiling mangoes and making flour from corn husks.

“Some of my neighbors now have food,” Leonard says in Chichewa, the local language. “It is painful for us.”

Miriam, a 33-year-old mother of four, didn’t know what insurance was when she learned about the ARC policy. But, she says, if money is available, “the government should speed up the cash transfer.”

The Malawi government says the ARC money was added to a much larger pool of relief funds from other sources, and that the disbursement was prompt. It expects to distribute maize in Salima through March. “We started in October, hence no delay,” says Mwafongo, the disaster response official. The response “is targeted at the most vulnerable households” and “does not include 100% coverage of a community,” he says. Malawi has renewed its ARC policy for the 2024 to 2025 season.

Domingo, the village official, had suggested that better times lay ahead because forecasts expected rain later that month. But the hoped-for rain only arrived in early December and quickly sputtered out.

A thousand miles away in Johannesburg, Ange Chitate, chief operating officer of ARC, faces uncertainty of her own. Reinsurance rates have surged on inflation and higher climate risk, leading to a 38% jump in risk premiums at a time when ARC’s balance sheet is drained from recent payouts. It will have to be replenished before the next disaster.

At least 15 more countries could join as paying members over the next five years, according to Chitate. But she says the ambition to insure 700 million Africans by 2034 is likely out of reach. For most African governments, she says, “insurance is still a luxury.”