5th International Disaster and Risk Conference IDRC 2014 Integrative Risk Management - The role of science, technology & practice 24-28 August 2014 in Davos, Switzerland

1. ARC Extreme Climate Facility (XCF)
Dr. Richard Wilcox, ARC Director General a.i.
5th International Disaster & Risk Conference IDRC Davos
24-27 August 2014

2. The ARC Group Structure
• SDFR pilot as input to the Agency’s Peer Review
Mechanism (PRM) to apply for Certificate of Good
Standing (CGS) required for insurance with the ARC Ltd
• Objective and independent disaster finance ratings also
facilitate private sector entry and public accountability.
• ARC-XCF will be a data-driven climate protection
scheme, supporting country-level climate
adaptation to build resilience to future climate
shocks
• Members of the ARC Ltd are eligible to participate
in ARC-XCF to access adaptation financing beyond
that afforded by insurance
ARC Group provides Africa’s climate change management and adaptation infrastructure
Sovereign Disaster
Finance Ratings (SDFR)
Extreme Climate Facility
(ARC-XCF)
OPERATIONAL
OPERATIONAL
OPERATIONAL
IN DESIGNPILOT

3. ARC 2014
Inaugural pool launched 1st May 2014 with five countries
insured for US$ 135 million against drought for a
premium of US$ 17.5 million
• Kenya, Mauritania, Mozambique, Niger, Senegal
Aggregate XL reinsurance structure placed in market
providing US$ 55 million in coverage for 2014 policy
period
ARC Agency starting to work with 8 more countries for
2015
• Aim to reach 20 countries by 2019 by providing
coverage against drought and flood
 ARC serves as an operational and concrete example of countries taking innovative steps to
reduce climate risk and access private capital
24 ARC Signatories

4. Context
Estimates give an adaptation investment cost need of USD 14-17 billion per
year over the period 2010-2050 for sub-Saharan countries to adapt to an
approximately 2C warmer climate by 2050
To date, funds have not been forthcoming in the magnitude required and it is
recognised that innovative and diverse sources of financing will be needed
As adaptation finance investment grows, it will be critical to have a fair and
objective mechanism for its allocation and distribution to help prioritise the
geographical location of the available investment flows

5. XCF
The XCF will be a data-driven financial facility, supported by both private and
public funds, that tracks extreme climate shocks and pays out directly to
countries to undertake adaptation if event frequency and intensity increases
ARC Agency was mandated to develop the XCF concept by the African
Ministers of Finance on 30 March 2014
“Requests the Secretariat of the African Risk Capacity Agency to develop a proposal for a vehicle by
which African Governments can gain access to climate financing, linked to increased climate
volatility, for adaptation activities and implementation of climate-resilient development pathways”
(Resolution L15)

6. Concept
Data-driven financial vehicle that tracks the frequency and magnitude of
extreme climate shocks in Africa
• Function: Additional financing for countries already managing their current weather risks through
ARC
• Data-driven: Payments to countries will be entirely data-driven over a 30 year period – if there is
no significant increase in extreme events over current climatology, then no payment is made
• Climate Adaptation: Where payments are made, countries must use those funds to invest in DRR
or climate change adaption measures specified in pre-defined country-level adaptation funds
• Scale: Payment size would increase with extreme event number and magnitude over and above a
severe threshold, corresponding to the degree of confidence that extreme events are increasing,
the climate has changed and that intensified adaptation is needed
• Action: Leveraging ARC’s existing infrastructure, XCF will ensure that countries and the
international community properly monitor climate shocks and are financially prepared to
undertake greater adaptation measures should their frequency and intensity increase

7. Recent Climate in Africa, 1983-2013

8. XCF Mechanism
• Designed to access private capital, the XCF would be structured along the lines of a catastrophe
bond programme issuing a series of multi-year cat bonds
• Donors would support cat bond coupon payments, while investors provide the capital
• Cat bonds would be parametric, based on an objective, multi-hazard Extreme Climate Index (ECI)
and focus on each climatological region of Africa
• Payments would be triggered from the bond principal should the ECI exceed a set threshold at
bond maturity, indicating a potential change in frequency and intensity of extreme weather
events in the region
• Should they occur, payments would start small and would increase with subsequent cat bond
issuances, growing alongside increasing evidence of observed deviations from the baseline
climatology
• Should extreme events continue to occur countries could stand to receive a predetermined
maximum dollar amount over the 30 year XCF adaptation period

9. Extreme Climate Index (ECI)
• An objective, weather data-based regional
index that tracks extremes in heat, drought,
cyclones, flood and other relevant weather
events over the XCF adaptation period
• If extremes occur during the adaptation
period, the ECI increases with each event
• No or small increases in the ECI would mean
no significant change in extremes from the
baseline period
• An increasing ECI could indicate a change in
the climate regime with respect to the
frequency and intensity of extremes
ECI: A composite index based on the
average of several underlying extreme
weather indictors including e.g.:1
• % of region in severe drought
according to the Standardized
Precipitation Index (SPI)
• % of region in severe moisture
surplus according to the SPI
• % of region with maximum
temperatures much above normal
• etc…
1 The ECI will be based on existing extreme climate indicators, e.g. World
Meteorological Organization, 2009: Guidelines on Analysis of Extremes in a
Changing Climate in Support of Informed Decision for Adaptation, Climate Data
and Monitoring, WCDMP-No. 72; Karin L. Gleason, Jay H. Lawrimore, David H.
Levinson, Thomas R. Karl, and David J. Karoly, 2008: A Revised U.S. Climate
Extremes Index. J. Climate, 21, 2124–2137.

10. XCF Illustration
• The XCF adaptation period is broken down in to
non-overlapping 5-yr periods, or “financing
windows”
• Each represents an issuance in the XCF cat
bond series
• Payments are triggered to eligible countries at
the end of the financing window if the ECI
exceeds a pre-specified threshold at the end of
the 5-yr period
• The thresholds are set with reference to the
baseline climatology to capture upward shifts
in the ECI and therefore an increase in
frequency and intensity of extreme weather
events in the region
ECI

11. XCF Illustration
$5m/ECI Unit
$10m/ECI Unit
$15m/ECI Unit
$20m/ECI Unit
Multi-Hazard Extreme Climate
Index (ECI)
XCF Cat Bond Payment Trigger
Accruing ECI Events per Country:
Graphic Key:
Payment Released at end
of 5-Yr Financing Window
ECI

12. XCF Illustration
ECI• Should severe events occur, cat bond attachment
levels could shift up to reflect the heightened risk
in a potentially new climate regime (as shown in
example). Risk below this level, but above the
original threshold would be funded through an
insurance sub-layer (shown in green)
• Donor capital may be required to fund this sub-
layer should the affordability or interest from the
private sector for the cat bond programme and/or
insurance sub-layer provision decrease
• This model leverages private capital to fund the
uncertain risk, particularly during the start of the
30 year adaptation period , with donor funds
reserved for more certain/frequent risk

13. XCF Illustration: Worked Example
$5m/ECI Unit
$10m/ECI Unit
$15m/ECI Unit
$20m/ECI Unit
Multi-Hazard Extreme Climate
Index (ECI)
XCF Cat Bond Payment Trigger
Accruing ECI Events per Country:
(as-needed insurance sublayer, green)
Graphic Key:
Payment Released at end
of 5-Yr Financing Window
ECI
Payment of $190m/Country;
attachment level moves
Payment of
$220m/Country from
donor-funded sub-layer
Payment of $30m/Country
Replicated for all regions in Africa,
with an ECI/thresholds defined
uniquely for each region

14. XCF Structure & Operation
Capital
Market
Investors
XCF Ltd
Principal
Coupon (Return + Premium)
Principal Returned
at Maturity if No Triggering
ECI Event Occurs*
Principal to Region if
Triggering ECI Event Occurs*
Premium (Paid by Donors)
Collateral Account
Principal Return
ARC Agency facilitates direct contracting with
countries and approves country participation
* Either all or a partial amount of the principal could be triggered depending on the severity/frequency of ECI events during cat bond tenor
and the region or regions in which the events occur
• XCF Ltd would be a second financial affiliate of ARC Agency, a special purpose company that would
enter into direct swap agreements with participating countries and then issue a series of multi-year
cat bonds linked to these agreements to investors
• ARC Agency would be the gateway for country participation in XCF by approving country adaptation
plans and facilitating country interactions with XCF Ltd
Example of possible XCF structure and funds flow:
Region 2
Country 1
Country 2
Country 3…
Region 1
Country 1
Country 2
Country 3…
Region 3…
Country 1
Country 2
Country 3…

15. Back Up Slides

16. XCF Design R&D Programme
Work to elaborate XCF concept and design its structure and operational principles is
planned over an 18 month period, focusing on four core R&D pillars:
 Pillar 1: Adaptation Planning & Standards for Climate Resilient Investments
• Ascertain to what extent implementation-ready country-level adaptation plans
exist, and compile best practice for the development of investment-ready
adaption plans
• Identify the absorption capacity for direct climate funding in Africa
 In discussion with Climate Development Knowledge Network (CDKN) for a 12
month GBP 250,000 Pillar 1 research collaboration

17. XCF Design R&D Programme
Work to elaborate XCF concept and design its structure and operational principles is
planned over an 18 month period, focusing on four core R&D pillars:
 Pillar 2: Extreme Climate Indices and Severe Event Thresholds
• Identify appropriate climate indices and thresholds that could be used to track
increasing severity and frequency of weather extremes across Africa
• Building on the success of Africa RiskView, the XCF indices would need to be multi-
hazard and region-specific in order to effectively track the range weather events
critical to a geographical area
• Cutting-edge climate work would build on existing research in the field of time-
dependent climate change detection to develop thresholds and an objective
threshold-setting methodology that could be applied to signal a statistically
significant shift in a regional climate regime to one more conducive to generating
extreme weather events
 Outlining work programme with ARC climate research partners in Africa, US and
Europe

18. XCF Design R&D Programme
Work to elaborate XCF concept and design its structure and operational principles is
planned over an 18 month period, focusing on four core R&D pillars:
 Pillar 3: Financial Structure
• Using the ARC platform, explore legal structures and domiciles that could be
considered for the XCF, including identifying viable financing options for XCF’s long-
term and innovative risk
• Identify market/donor risk appetite and potential size of the facility
• Define work-plan and budget to establish and operationalise the facility
 Initial discussions with ARC partners and advisors

19. XCF Design R&D Programme
Work to elaborate XCF concept and design its structure and operational principles is
planned over an 18 month period, focusing on four core R&D pillars:
 Pillar 4: Towards a Global Mechanism
• Investigate how a supra-regional XCF could be structured and how the concept
would have to be modified to allow for a global XCF mechanism
• Ascertain country-level interest for an expansion of the XCF beyond Africa
• Assess the additional work required to develop such a global mechanism
 Collaboration with the Caribbean Catastrophe Risk Insurance Facility, and
outreach to other regional insurance initiatives