Humanitarian Aid as Insurance: WFP Drought Insurance Project International Seminar on Emergency and Agricultural Insurance Porto Alegre, Brazil 30 June 2005
OVERVIEW Concept Humanitarian Aid as Insurance Tool Weather Derivative (Detail on Friday) Next Steps
ECONOMIC LOSS RISKS 2005 2015 2030 Population (Ethiopia) 73 Mil 95 Mil 129 Mil Population under 15 (Ethiopia) 31 Mil 38 Mil 43 Mil Population at risk of drought (Ethiopia) ~ 22 Mil ~ 28 Mil ~ 37 Mil Population at risk of drought (sub-saharan Africa) ~ 250 Mil ~ 300 Mil ~ 400 Mil
AID AS INSURANCE Uninsured asset and income losses trap vulnerable populations in poverty Emergency is aid is insurance for vulnerable populations in developing countries Difference: insurance provides contingency funding in event of shock; humanitarian aid seeks funding for assistance after shock Insurance is risk management instead of emergency response Contingency funding is of far greater value to beneficiaries; transfers risks from vulnerable to financial markets Effective insurance function of humanitarian assistance requires financing
RISK MANAGEMENT 1. Quantify risk 2. Price risk 3. Retain or transfer risk Emergency aid has critical insurance function for development Insurance approach allows for sound country development portfolios to include insurance and investment
FLOW OF FUNDS Reinsurers Premiums Payouts Customers (Donors) Premiums Contributions Timely and appropriate aid FLOW OF RISK Contingency plan for each zone Population at Risk (Beneficiaries)
Mali Example REQUENCE DE EVENEMENT 1% ASSURANCE CONTRE LA SECHERESSE BASEE SUR UN INDICE CLIMATIQUE }2 MILLIONS BENEFICIAIRES 10% FONDS DE SECURITE ALIMENTAIRE (FSA) 5.5 Milliards CFA + Réapprovisionnement des dispositifs du CSA-PRMC si leur réduction résulte d'extrême climatique }2 MILLIONS BENEFICIAIRES 100% STOCK NATIONAL DE SECURITE ALEMENTAIRE (SNS) 35,000 MT
INDEX 110,000,000 100,000,000 15 15 Mil at risk beneficiaries receive assistance Payout from Insurance Contract ($US) 90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000 Insurance Trigger Level 30,000,000 20,000,000 1973 1978 1983 1988 1993 1998 2003 Harvest Year Using data in the process of being cleaned, work in progress
WHAT IS A INDEX? An objective and observable measure used to describe the variability in a specific underlying component(s), e.g. Dow Jones Industrial Average is made up of 30 component stocks. A verifiable index that correlates closely with an underlying economic impact creates an opportunity to manage this risk. To manage the risk of drought in Ethiopia we must quantify the financial impact of each lost millimeter of rainfall on the lives and livelihoods of the beneficiaries
WHAT IS WEATHER RISK PROTECTION? Financial protection based on the performance of a specified index in relation to a specified trigger. Offers protection against uncertain costs that result from index volatility through mitigating payments settled against the same index that has been determined to cause the losses. The underlying Ethiopian index can replicate the existing EWS and use it as a basis for financing emergency relief operations in extreme years
THE WEATHER MARKET First weather derivative transaction in U.S. 1997 Deregulation of the energy industry Market has rapidly grown - Global transacted $4.6 billion (PWC Survey 2004) Non-energy applications New participants Global development Broader product offering Key Players: (Re)insurers Investment Banks Hedge Funds $21B Transacted through March 31 2004
PROCESS NEXT STEPS Feasibility study for the Sahel region and Southern Africa: June 2005 onwards Coverage calculation, client education, final index specification: Sept 2005 Confirm ODA eligibility, CAP inclusion Project document submission, Legal preparation: September 2005 Decision on launch: October 2005 Appeal for premium funding: 4th Quarter 2005 (US leg & Constituency building) Competitive pricing through auction: 4 th Quarter 2006 Coverage for Ethiopia s 2006 Agricultural Season PILOT OUTCOMES Feasibility of coverage, demonstration effect of transaction risk priced in international markets allows donors & beneficiary governments to quantify their exposure and make informed choices on retention vs. transfer and investment vs. insurance First effort at estimating developmental (growth) impact of insurance-based emergency assistance