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Saturday, March 18, 2006

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Saturday Feature
 
UN takes out drought insurance
Mark Turner
3/18/2006
 

          The United Nations' World Food Programme has given Axa Re, the French reinsurer, the first UN humanitarian emergency insurance contract, in an effort to get aid to victims before the worst of a crisis takes hold.
Even when famines win media attention, donor funds generally arrive only after the damage is well advanced, costing needless lives and resources and making it harder to recover,
So the WFP went to the market last year with a proposal: why not spend a little more upfront, potentially to save a lot more later?
The proposition is to pay a premium, and if the rains do not fall get a payout. That way, the aid starts flowing before the cattle die, the household goods are sold off, and the pictures of dying children reach the television screens.
In a pilot project for this year's March-October growing season in Ethiopia, the UN will pay $930,000 (euro772,000, 530,000). If precipitation, measured on an index of 26 weather stations, drops below a certain amount, Axa pays out up to $7.1m.,
For WFP, the hedge moves the risk away from vulnerable Ethiopians to donors and the financial markets.
In the long term, it should provide a more efficient use of donor funds, as money spent sooner is more effective. It could also save many lives.
For Axa, one of six insurers who bid for the contract, it offers a door into a potential new sub-Saharan African market, complementing its existing weather business in Europe, the US and the Far East.
"We are looking to diversify our exposure," said Jean-Christophe Garaix, Axa Re's weather risk underwriting manager.
"We have made a lot of progress in meteorology in the last few years: we know all is linked. The models are global."
Axa is also talking directly to governments in other countries, which may be able to afford their own insurance premiums.
The drought insurance announcement comes as aid agencies complain that a new UN standing emergency fund, could be significantly underfunded.
The Central Emergency Response Fund has received less than $200m in pledges far-short of the $500m target.
"We need a variety of approaches to address hunger," James Morris, the WFP head, wrote to donors. "The Ethiopian drought insurance project is an innovative way of approaching risk management in a very challenging setting."

 

 
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