ARC’s covenant

Where’s the liquidity?

This year has brought prolonged dry spells to many parts of Malawi. In April President Peter Mutharika declared a state of emergency because of food shortages; yields of maize, the staple crop, are a third below their five-year average. Prudently, Malawi had bought drought insurance from the financial affiliate of African Risk Capacity (ARC), an African Union initiative to fund disaster relief. There is one problem: ARC has not paid out.

Malawian officials had spent three years preparing to join the scheme. They found lots to like. Risks were pooled across the continent. Sophisticated software would model rainfall and its impact on households. If the rains failed, a payout would come quickly, before more typical emergency assistance kicked in. “It was beautifully crafted,” says one civil servant. Malawi signed up last year.

Under the terms of the policy, a payment would be triggered if more than 1.39m people were affected by drought. A joint assessment by the government and international agencies reckons that 6.5m people will need aid by January. Yet ARC’s software, bizarrely,…Continue reading

This post was originally published in the Economist.

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ARC’s covenant

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