The Potential for Scale and Sustainability in Weather Index Insurance

THE POTENTIAL FOR SCALE AND SUSTAINABILITY IN WEATHER INDEX INSURANCE
FOR AGRICULTURE AND RURAL LIVELIHOODS
market. The insurance targeted a group of 5 million transiently food-insecure people who
are directly affected in the case of drought. 18
The Ethiopian Drought Index (EDI) was developed using historical data provided by the
National Meteorological Agency (NMA), together with a crop water-balance model.
Rainfall was monitored at 26 weather stations installed across the country. The index had
an 80 per cent correlation with the number of food aid recipients from 1994 to 2004, which
demonstrated that it could act as a good indicator of human need when drought strikes.
Extension officers in the field reported that the index effectively tracked rain. Axa Re
reinsured the contract, with a premium set at US$0.93 million and a maximum payout of
US$7.1 million in the event of severe drought.
At the end of the coverage period in October 2006, the EDI was well below the
US$55 million trigger level, as rainfall was above normal that year; thus no payout was
made. Despite this fact, the pilot demonstrated the feasibility of index insurance. It showed
good capacity-building between the Government and local partners, including NMA, which
was able to deliver quality data.
The policy was not renewed in 2007 due to lack of donor support. However, other indexinsurance
pilots did follow this initiative. 19
Box 1: LEAP software
Following the first index insurance pilot in Ethiopia, under the guidance of agronomist and
weather expert Peter Hoefsloot, WFP and the World Bank developed the Livelihoods, Early
Assessment and Protection (LEAP) software application. Based on the Water Requirement
Satisfaction Index (WRSI) of the Food and Agriculture Organization of the United Nations
(FAO), the software allows users to quantify and index the drought and excessive rainfall risk
in a particular administrative unit. The software monitors this risk and guides disbursements
for the scaling up of the Ethiopian Productive Safety Net Programme (PSNP), a Government
programme that targets the poorest people facing food insecurity in any type of weather.
LEAP runs localized models to convert rainfall data into crop or rangeland production
estimates and subsequently into livelihood stress indicators for vulnerable populations. It uses
ground and satellite rainfall data to map the whole of Ethiopia, and it is able to cover areas
without weather stations, so that all administrative units in the country can be included. LEAP
then estimates the financial magnitude of the livelihood-saving interventions needed in the
event of a weather shock. It thus provides a good estimate of the funding needed to protect
transiently food-insecure people’s livelihoods at a time of shock – and it does so through an
independent, objective, verifiable and replicable index of livelihood stress.
18 ‘Transiently food-insecure’ describes people that are usually not food insecure (i.e. in favourable weather
conditions). However, they are likely to become food insecure in the case of drought or floods. They are not part
of the Productive Safety Net Programme (PSNP) ‘regular’ or chronic beneficiary caseload. The idea is to prevent
them from becoming chronically food insecure.
19 Ulrich Hess and Laura Verlangieri, Disaster insurance in Ethiopia, in Index insurance and climate risk: Prospects
for development and disaster management, ed. M.E. Hellmuth, D.E. Osgood, U. Hess, A. Moorhead and H.
Bhojwani. Climate and Society No. 2 (New York: International Research Institute for Climate and Society (IRI),
Columbia University, 2009).
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