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The African Risk Capacity is a Specialized Agency (ARC SA) of the African Union (AU) that will work with a financial affiliate (ARC F) to govern the first pan-African parametric risk insurance pool for severe drought. Payments from the pool will serve as contingency funding mechanism to participating national governments. Technical capacity is provided by the United Nations World Food Programme (WFP) under a special service contract between WFP and the AU.

The ARC was first conceptualized in 200X by Dr. Richard Wilcox and Dr. Joanna Syroka following the RMFC in Ethiopia and Malawi's weather insurance scheme.

As the ARC is participatory in nature and must meet financial requirements to transfer drought risk to international markets, the design phase of the ARC envisioned a two-tiered approached to its governance. On 23 November 2012, the ARC Specialized Agency (ARC SA) of the African Union (AU) was established by treaty as an independent specialized agency of the African Union by eighteen member states of the AU. The ARC Agency is envisaged to set up a subsidiary financial operating entity or entities to manage the ARC risk pool, which is known as ARC F. For information on the governing structures of both entities, refer to the Governing Structure section.

There are two ways in which a country can participate in ARC - as part of the ARC SA governing structure, the Conference of Parties (CoP) and/or through an insurance contract with the ARC F. Participation in the ARC SA CoP requires a country to be an African Union (AU) member state and to have signed the ARC Establishment Treaty. See roles of the CoP in the Governing Structure section.

To participate in the ARC F risk pool, countries must submit a Contingency Plan that meets requirements adopted by the ARC SA Governing Board. If these plans are deemed acceptable, the country will recieve a Certificate of Good Standing, which allows them to participate in the next available risk pool. Contingency Plans must be updated and resubmitted every other year. Under the service agreement between the AU and the UN World Food Programme (WFP), in the form of a Pre-Participation Agreement (PPA), WFP has agreed to provide up to 12 months of capacity building to the first potential risk pool participants. Capacity building includes refinement of the Africa RiskView software, institutional strengthening and guidance on contingency plans. Subsequent PPAs and accompanying capacity building are contingent on donor funding.

The ARC Agency will be governed by Conference of Parties (CoP). Any AU member state that has signed the ARC Establishment Treaty may participate in the CoP, which is primarily concerned with appointing or dismissing the Executive Director, approving the Programme of Work and Budget, electing the members of the Governing Board, adopting rules for ensuring Parties’ compliance with approved Contingency Plans, deciding on the establishment and location of any ARC Agency Subsidiary or Affiliated Entity, and establishing rules governing the issuance and withdrawal of Certificates of Good Standing (see Contingency Planning) for the ARC Agency. The Executive Director will be the presiding member of the Governing Board.

The functions of the Governing Board (Board of Directors) shall be to establish, or cause to be established, ARC Agency Subsidiary or Affiliated Entities as the CoP may deem necessary, advise the members or shareholders of any ARC Agency Subsidiary or Affiliated Entity, oversee the operations of any ARC Agency Subsidiary or Affiliated Entity, oversee the operations of the Executive Director and the Secretariat, set standards for development and updating of Contingency Plans by Parties, approve initial Contingency Plans, as well as updated or revised Contingency Plans, and approve and amend the Financial and Staff Regulations of the ARC Agency.

A separate Governing Board will manage the ARC F and its risk pool. Members of the ARC F Governing Board will be experts in insurance, acturial sciences, risk transfer and drought, and must be nationals of an AU member state. The Executive Director of the ARC SA does not have direct control over the ARC F Governing Board, though the ARC SA Governing Board can call for the dissolution of any ARC affiliate should it be deemed necessary.

There are currently three offices (Johannesburg, Rome, New York) and one remote team (Amsterdam) of the ARC Secretariat, which includes all international staff members in client services and technical capacity. Johannesburg serves as the focal point of the three offices. All ARC Secretariat members report to the Executive Director of the ARC SA. Jurisdiction

The ARC SA will be based in Johannesburg, South Africa pending further discussions.

The ARC F insurance pool will either be based in Bermuda or Switzerland. If the pool is based in Switzerland, all "core" services of the financial affiliate must be based in-country. If the pool is based in Bermuda, all services may be remote. A final decisions on jurisdiction will be made by the ARC Secretariat in early-2013.

The Africa RiskView software is the technical engine - the means by which a drought is calculated - of the ARC risk pool. Countries that participate in the risk pool can change a number of parameters to calculate a drought. If the software calculates a drought severe enough according to a country's ARC insurance contract, a payout will be triggered.

Rainfall data from the National Oceanic and Atmospheric Adminsitration (NOAA) is inputted into the software, which in turn feeds into a calculation based on the default drought index, the Water Requirement Satisfaction Index (WRSI). Vulnerable populations are based on a household's distance from the national poverty line and the percentage of a household income that comes from agricultural activities (production, casual labor and livestock). These data are used to compute vulnerablility profiles that are then overlaid with drought data to determine which populations in a country are at-risk to drought. If ARV triggers a drought severe enough to trigger a payout according to a country's contract terms, each at-risk person is multiplied by a response cost number to arrive at the total estimated response cost for the drought. See ARC F Insurance Contracts for information on payouts.

In order to participate in the ARC insurance pool, a country must submit a contingency plan to the ARC SA Governing Board for approval to ensure a potential payout can be distributed in good time to beneficiaries. A country can submit a contingency plan without ARC consultation if it believes it has the necessary government disaster risk management and contingency planning mechanisms. If a country signs a PPA, 12 months of capacity building with the ARC Secretariat are available, including contingency planning strengthening.

Approval of contingency plans invovlves three steps. The first step is to submit an initial contingency plan for approval by the ARC SA Governing Board to obtain a Certificate of Good Standing that allows a country to access the insurance pool. In order to be approved by the Board, each activity of a contingency plan will have to satisfy basic eligibility criteria and implementability criteria. Proposed activities must be associated with adequate systems across five axes: monitoring and evaluation; needs assessment; targeting systems; administrative; logistics infrastructure. A final submission can be made up to one before an imminent payout. Countries must also report on the implementation progress of the payout.

DFA