MDA Federal ensures rainfall number accuracy for United Nations

In a first, UN agency buys insurance against drought

NAIROBI In a pilot project that could someday transform the world's approach to aid emergencies, the World Food Program, a United Nations agency, has taken out an insurance policy that will pay the agency should Ethiopia's notoriously fickle rains fail in 2006.

The policy's creators are calling it the first natural disaster insurance coverage for an international aid agency.

The policy, which costs $930,000, is designed to create a way of financing natural disaster aid. Instead of waiting for drought to hit and for people to suffer and then pursuing money from donors to respond, the World Food Program has crunched the numbers from past droughts and taken out insurance on the income losses that Ethiopian farmers would face should the rains fail.

If the rainfall measured at 26 weather stations around Ethiopia falls below a certain level between March and October, AXA Re, a large French insurer, will pay up to $7.1 million.

Such a big payout would follow a horrendous humanitarian crisis, one on the order of the 1984 drought that took thousands of lives in Ethiopia.

"We aren't wishing that," Richard Wilcox, the World Food Program's director of business planning, said in an interview from Ethiopia, where he was presenting the new plan on Monday.

Rather, the program is aimed at changing the way governments think about emergency aid. If it works, the insurance would get emergency money flowing faster, before the haunting images of dying babies reach television sets. It would also shift the risk from farmers to financiers.

The first gauge of success of the trial program was whether an insurance company would actually write a policy based on Ethiopian weather data. That has worked, partly because an American company, MDA Federal, based in Maryland, will ensure the accuracy of the rainfall numbers.

In all, the United Nations received five proposals from major international insurance companies. It accepted the offer from AXA Re, which already issues weather-related policies in other parts of the world.

Taking out insurance on the vagaries of Mother Nature is common practice. Natural gas suppliers do it, knowing their profits will dip if the winter is mild. The same goes for farmers, who take out insurance in case of frost or excessive heat. Hurricane coverage and flood coverage are now standard offerings, as well.

So why not drought coverage for some of the poorest of the world's poor?

Wilcox said the ultimate goal was for African governments to take out their own insurance policies so that a year of drought has less of an impact on their populations.

Such a policy would make particular sense in Ethiopia, where droughts are chronic and their effects on the population are profound.

Measuring the impact of drought remains an inexact science.

The United Nations was able to quantify the effect of certain levels of rainfall on Ethiopian farmers' incomes. But calculating such data for the country's many nomads has proven more complicated, and they have been left out of the insurance model.

"We're testing a new tool here," Wilcox said. "It's a different way of operating. We're doing this for the same reason we all get insurance ourselves. If I didn't have car insurance and I had a major accident, it would be much costlier and I could spend the rest of my life trying to pay it back."

Droughts in Ethiopia are localized in certain parts of the country and the effects are concentrated. Especially bad years are those in which the suffering spreads.

Under the insurance policy, the food agency will receive a payoff if rainfall drops so low that 17 million subsistence farmers lose the equivalent of $55 million in income. There have been only a few years in the last quarter century that have gotten that bad, officials said.

Not everybody endorses the idea of spending humanitarian donations on insurance. When the food agency presented the idea in Ethiopia, some aid worker considered it a waste of money to allocate so much on a policy instead of putting it directly into food. Ethiopian authorities were also initially perplexed by the plan, officials said.

But the pilot project won the support of the U.S. government, especially Michael Hess, an assistant administrator at the Agency for International Development who was previously a risk reviewer and vice president at Citibank.

"I would like to see it spread," he said in an interview from Washington, noting that most American farmers already have insurance in case of drought.