An insurance company set up in Bermuda nearly a decade ago is to provide drought-affected households in Malawi with swift relief with an upcoming climate insurance payout.

The payout will be made by African Risk Capacity Limited to the Malawian government.

It comes nine years after African Risk Capacity Group set up a hybrid mutual insurance company, ARC Insurance Company Limited, in Bermuda to serve 35 African Union member states.

ARC was the first African risk insurance pool, reducing governments’ reliance on external emergency aid.

The company was cited as an example of Bermuda’s strength as an innovator by Tim Neilander, senior legal adviser at the African Risk Capacity Group, when he was featured on a panel at last month’s inaugural Bermuda Climate Summit.

Malawi is a signatory of the ARC Treaty established by African Risk Capacity, a specialised agency of the African Union, aimed at helping AU member states improve their capacities to plan, prepare and respond to extreme weather events and natural disasters.

The objective of the ARC is to assist AU member states in reducing the risk of loss and damage caused by extreme weather events and natural disasters affecting Africa's populations by providing targeted responses to disasters in a more timely, cost-effective, objective and transparent manner.

ARC Limited's parametric insurance covers against weather-related perils, which are occurring in increasing frequency and severity as the impact of climate change increases.

The Malawi government had selected sub-national triggering risk transfer to address localised drought spells and insured a total of four cluster policies, which covered different regions in the country, explained Lesley Ndlovu, ARC Limited CEO.

He said: "We expect the payout amount in June to be over $14.2 million, which will be used to provide food assistance [in kind or cash] to vulnerable households, as well as scaling up an existing social cash transfer programme."

The payout is only one component of the support provided by ARC.

ARC is aligned with national policies and strategies – for example, the Malawi National Disaster Risk Financing Strategy -- so that whatever cash is made available can benefit the local people to best effect.

To that end, an ARC delegation met government and civil society last year to share insights about weather insurance for climate resilience and help authorities plan, prepare and respond to extreme weather events.

The $14.2 million will be disbursed to the World Food Programme, which remains a crucial cog in advocating for better risk-management systems and funding related to climate-change effects.

Last November, after drought and pests destroyed significant volumes of crops, up to 65,000 Malawian farming households received cash payouts -- amounting to $2.4 million in total -- from a UN WFP agricultural insurance programme.

"With the changing climate, farming can be an uncertain business in Malawi, especially for smallholder farmers," said Paul Turnbull, WFP Malawi country director and representative, at the time.

"The payouts are a springboard for farmers to continue their efforts in adapting to increased weather-related shocks and in fighting both food insecurity and poverty."