Djibouti Purchases its First Sovereign Insurance Policy to Protect Thousands from Climate Risks

Feb 22

There is a growing trend that climate shocks are increasing in frequency and intensity due to climate change. Djibouti, situated in the disaster-prone Horn of Africa, is highly vulnerable to droughts, floods, heatwaves, and earthquakes. The population suffers from these shocks, with 33 percent of the population living in high hazard risk zones, and the rest of the country also suffering as 35 percent of the economy is chronically vulnerable to floods and droughts[1].

To increase Djibouti’s financial resilience against drought and flood risk, the Government partnered with African Risk Capacity (ARC) and the World Bank Group (WBG) to implement its first sovereign insurance policy. The WBG committed to fund US$2 million for insurance premium subsidies through the Horn of Africa: De Risking Inclusion and Value Enhancement of Pastoral Economies (DRIVE) Project. This includes a US$1 million grant from the Global Shield Financing Facility (GS-FF).

The policy was signed on Thursday 19th January 2023 and will cover Djibouti-city in case of extreme rainfall events for up to US$1.4 million per year, as well as protecting the country from extreme drought events for up to US$0.8 million per year. Payouts, when triggered, will provide rapid cash flows to fund the emergency response. Aiming particularly at reaching vulnerable populations to better cope with the immediate impacts of shocks and avoid negative coping mechanisms. Insurance is also an effective financial management tool that can benefit Djibouti’s public budget and coping strategies.

FCI’s Disaster Risk Financing and Insurance Program (DRFIP) provided vital technical expertise in the creation of the policy. This is the first time the WBG is supporting the financing of a climate insurance by ARC and the first time ARC is extending a multi-year and multi-risk policy.