Swiss Re Backs African Weather Derivative Drought Coverage

Swiss Re, in conjunction with the Earth Institute at Columbia University and the Millennium Promise Alliance, have developed a new system of weather derivative contracts, providing protecting to several villages in Kenya, Mali and Ethiopia against severe drought.

They cover small farmers against “drought-related livelihood shocks such as food shortages and famines,” said the announcement. About 150,000 people will benefit from the coverage. The innovative derivative covers three village clusters situated in Sauri (Kenya), Tiby (Mali), and Koraro (Ethiopia). Under the agreement Swiss Re provides up to $2 million of financial protection in the case of extreme drought.

Swiss Re noted: “Tailored insurance or derivative contracts are becoming an increasingly important instrument for managing weather-related risks in emerging markets. In the case of the three African village clusters covered, for the first time ever, a non-profit organization complements its existing initiatives in its fight for sustainable development with financial risk transfer instruments designed to mitigate the consequences of weather variability.

“The payout of these financial instruments is based on information derived from a blend of satellite and weather data used as an objective proxy for staple crop production in the three village clusters.”

Juerg Trueb, Head Environmental and Commodity Markets commented: “This project is an important milestone in our attempt to adapt and deploy advanced risk management and financial market instruments for the benefit of the agricultural sector in developing markets.”

Source: Swiss Re: