The Potential for Scale and Sustainability in Weather Index Insurance

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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). ANNEX 87
88 CASE STUDY 3 INDEX INSURANCE IN ETHIOPIA – THREE PILOTS The following graph illustrates an example of the use of LEAP software in calculating droughtindex value flow against a trigger level. 20 Ethiopia drought index value 1952-2002 Ethiopia drought index value $90,000,000 $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 $0 1952 Source: Hess and Verlangieri (2009). 1962 1972 1982 Harvest Year Once the data are collected and the index is defined, it is necessary to identify the number of beneficiaries in the regional drought index. The Regional Water Requirement Satisfaction Index (RWSI) model was developed to elaborate such a correlation by using historical beneficiary numbers. The model is a weighted average of the WRSI computed by LEAP. In this model, the number of beneficiaries (N) increases when the drought index decreases. As a result, when the drought index is large (meaning that drought is not severe), the increase in beneficiaries is small, and when the drought index is small (meaning that drought is severe), the increase in beneficiaries is large. However, in the relationship between the number of beneficiaries and the RWSI, a failure level exists. This ‘F level’ shows the catastrophic conditions at which maximum livelihood protection assistance effort would be required (when the index reaches the F level, the entire population is at risk). 21 Regional Water Requirement Satisfaction Number of Beneficiaries F Level 1992 2002 Index Trigger 0,00 0 10 20 30 40 50 60 70 80 90 100 Regional Water Requirement Satisfaction Index 20 Ibid; and Peter Hoefsloot presentation during a meeting of the Ministry of Agriculture and Rural Development in December 2009. 21 Sandro Calmanti, Italian National Agency for New Technologies, Energy and Sustainable Economic Development (ENEA). Presentation during a meeting of the Ministry of Agriculture and Rural Development in December 2009.
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Contacts IFAD Francesco Rispoli f.r
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The Potential for Scale and Sustainability in Weather Index Insurance

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