WFP - Final Report on the Ethiopia Drought Insurance Pilot Project

Overall Objective

1. The pilot achieved its overall objective of demonstrating the feasibility of establishing contingency funding by transferring LDC weather risks to international risk markets. Such contractually guaranteed contingency funding contributes to a risk-management system that provides prompt assistance in times of drought before people resort to distress sales of assets, thereby protecting livelihoods, preventing more people from falling into destitution and enhancing resilience to future shocks.

2. The project demonstrated that it is possible to index drought risk, and that a drought-risk index1 for Ethiopia can be objective enough to be transferred. It also facilitated price discovery for Ethiopian drought risk in international markets. Such price information can help the Government and donors to focus on the most cost-effective and cost-efficient means of dealing with weather risks by determining the optimal interaction of risk retention, means of risk transfer and mitigation. This pilot contributes to the ultimate goal of a comprehensive risk-management solution for Ethiopia. The developed index complements the current early-warning system. By monitoring such an index in real time, as in 2006, the Government and its partners can anticipate drought-related losses over an agricultural season and assess their financial and operational preparedness.