ARC & Munich Re back parametric cover integrated into disaster-adapted loan

African Risk Capacity Ltd. has provided parametric insurance and Munich Re has provided parametric reinsurance to support an innovative disaster-adapted loan offering from the West African Development Bank (BOAD).

For a pilot phase, a loan portfolio totalling over US $350 million will be covered by parametric insurance, against the impacts of natural and health disasters.

The innovative offering integrates a subsidised loan with parametric insurance that covers borrowers’ payment obligations in the event of qualifying events breaching the pre-defined triggers.

The pilot phase covers Benin, Côte d’Ivoire, Senegal and Togo, with its effects being to help BOAD member countries bring forward climate investments and projects, whilst building greater resilience.

“In the event of natural or health disaster such as drought, flooding, epidemic or pandemic, the insurance mechanism will be triggered, temporarily lifting borrowers’ repayment obligations,” BOAD explained.

“The insurance mechanism therefore indirectly provides financial assistance, should the need arise, without affecting the underlying loan agreements, therefore providing flexibility and rapid financial relief.”

African Risk Capacity Limited (ARC Ltd) provides parametric insurance to BOAD against losses related to the deferral of annual instalments on the loans, while Munich Re, which provides parametric reinsurance to ARC Ltd.

“BOAD and WAEMU member countries welcome the introduction of this innovative tool, which provides financial support to the most vulnerable and exposed countries to climate and health risks, by facilitating debt servicing and improving resilience to shocks, ” said Mrs Gnékélé GNASSINGBE, Head of Treasury and Capital Markets Department of BOAD.

“ARC Ltd. is committed to helping African countries build the financial resilience required to address the unpredictable impacts of climate and health disasters. By integrating parametric insurance into sovereign loan portfolios, we are providing immediate relief and enabling countries to maintain their development path even in the face of adversity. This innovative initiative reflects the importance of innovative financial solutions and reinforces our shared mission to provide rapid support,” Anaïs Symenouh, Head of the Legal Department at ARC said.

Michael Roth, Munich Re’s Public Sector Practice Lead and Project Manager on behalf of Munich Re added “We are very proud to have contributed our expertise to the development of the disaster-adapted loan program. The launch of this program is a superb demonstration of the use of parametric insurance to cover the maturities of sovereign loan portfolios. BOAD’s success should serve as a model to be replicated in other regions of Africa, and beyond.”

Natural catastrophe event triggers have already been integrated into sovereign debt financing arrangements and contingent capital solutions, with a triggering event forgiving instalment payments for a time, or activating the financing layer.

This takes it a step further, by covering the instalment shortfall with parametric insurance, so meaning the provider of the loan is not hurt by any gaps in payments being made after natural catastrophes and epidemic or health disasters strike.

This helps to ensure continuity of financing, with a responsive approach calibrated to the disaster experience of the loan beneficiary country while also protecting the ability of institutions to maintain their financing promises.

The World Bank is also planning to more deeply integrate parametric risk transfer into some of its financing solutions, specifically with the Regional Emergency Preparedness and Inclusive Recovery Program (REPAIR).