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NEW YORK: Ten of the world's largest reinsurance companies have been invited to tender for a bold pilot scheme to insure Ethiopia against drought.
The United Nations' World Food Programme (WFP) has approached insurance companies using an index based on Ethiopian rainfall patterns in some of its most vulnerable areas. While not perfect, it reckons the index can predict losses of household income with 85 per cent accuracy.
Assuming the project goes ahead, WFP will pay a yearly premium to the chosen insurer. If rainfall is less than certain levels, the insurer will pay out $15m-$20m.
That money would provide an important source of funds before people start suffering. The project marks a significant first step towards introducing modern risk management techniques to the aid industry.
"Donors are de facto reinsurers," says Richard Wilcox, WFP's director of business planning, "and intelligent reinsurers manage their risk."
On the other side of the coin, he says, business people are interested in diversifying their portfolios in response to changing world weather patterns.
It is still unclear, however, what it will all cost. Some fear the industry will charge exorbitant prices.
Donors have been understandably cautious. There are concerns at giving aid money to the insurance industry.
Nevertheless, the US has offered to pay 50 per cent of the pilot project costs, and the WFP hopes to win more commitments by the end of the month, when the tenders are due.
Mr Wilcox concedes the project is something of an experiment, and he cannot predict the outcome. But "it's well worth trying", he says. "The system as it is now is not acceptable."
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