UN takes out world’s first drought insurance

The contract with French reinsurers AXA Re will pay out US$7 million in contingency funding should the African state be hit by extreme drought.

The UN’s move to insure against a particular environmental crisis is the first of its kind and would allow the WFP to get aid flowing into the country before the scale of the problem made a reaction far more difficult, and costly.

A pilot scheme, the Ethiopian insurance could be used as a model for further policies if successful.

“The humanitarian emergency insurance contract might, in the future, offer us a way of insuring against these massive losses before they spell destitution for millions of families,” said WFP executive director James Morris in a statement.

In the case of a pay out, the money would be used to help the millions of poor who would be affected by drought.

While the experimental pilot would only cover a fraction of the cost of any full-blown aid effort, the model has been designed on the basis of the potential losses that 17 million poor Ethiopian farmers risk should an extreme drought arise.

The policy, a derivative based upon a calibrated index of rainfall data gathered from 26 weather stations across Ethiopia, takes advantage of financial and technical innovations in the weather risk market.

Payment will be triggered when data gathered over a period from March to October indicates that rainfall is significantly below historic averages, pointing to the likelihood of widespread crop failure.

There is nothing new about the insurance industry dabbling in the politics of climate change – the large finance houses have been warning for several years that an increased incidence of extreme weather events will drive up the cost of corporate, and domestic, policies (see related story).

And while there have been individual attempts to future proof companies and homes with insurance against climate change, the WFP’s move is the first attempt to get cover against a potential humanitarian disaster.

The UN has not revealed how much it is paying in premiums.

by Sam Bond