Expert Meeting – Requirements of Weather Markets WMO Expert Meeting – Requirements of Weather Markets WMO December 5, December 5, 2007 2007 Ulrich Hess, Chief of Business Risk Planning Ulrich Hess, Chief of Business Risk Planning Drought Risk Management in Drought Risk Management in Ethiopia – the big LEAP* Ethiopia – the big LEAP* *Livelihoods + Early Assessment + Protection
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Expert Meeting – Requirements of Weather Markets WMO December 5, 2007 Ulrich Hess, Chief of Business Risk Planning Ulrich Hess, Chief of Business Risk.
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Expert Meeting – Requirements of Weather Markets WMOExpert Meeting – Requirements of Weather Markets WMO
December 5,December 5, 2007 2007 Ulrich Hess, Chief of Business Risk PlanningUlrich Hess, Chief of Business Risk Planning
Drought Risk Management in Drought Risk Management in Ethiopia – the big LEAP*Ethiopia – the big LEAP*
*Livelihoods + Early Assessment + Protection
AGENDAAGENDA
• Risk: Managing Risk instead of Managing Disasters
• Ethiopia Phase I: Pilot 2006
• Ethiopia Phase II: Risk Management Framework
PROBLEM: TIMING and NATURE OF PROBLEM: TIMING and NATURE OF INTERVENTIONSINTERVENTIONS
E.g. Safety Net Areas - HighlandsE.g. Safety Net Areas - Highlands
Ethiopia Pilot Drought Insurance Ethiopia Pilot Drought Insurance TransactionTransaction
• designed in response to Government’s concern that Ethiopia was wrought in a cycle of responding to disasters rather than managing risks.
• tested the possibility of leveraging donor contributions to secure a reliable, timely and cost-effective way of funding emergency operations
THE 2006 ETHIOPIA THE 2006 ETHIOPIA TRANSACTIONTRANSACTION
• Risk Transfer Structure–Counterparty (buyer of option): UN World Food Programme – on behalf of Government of Ethiopia
• Competitive Tender Process–Official UN WFP procurement process–9 companies invited to tender, 5 participated–Tender Winner (seller of option): AXA Re, Paris–Final Transaction:
• Premium: $930,000, paid by USAID mainly• Maximum Payout: $7,100,000
Lessons Learnt from the PilotLessons Learnt from the Pilot• There is a market for Ethiopian drought risk; • possible to develop objective, timely and
accurate indicators that serve as a relatively good proxy of actual aggregate needs;
• Ethiopian weather data from NMA satisfies international weather risk market standards; and
• If insurance is to become an effective risk-management tool for Ethiopia, it must be coordinated with other financial instruments to provide more comprehensive coverage of Ethiopia’s drought risks.
Early Warning System
with reliable baseline and trigger points
Contingency Planning
for appropriate and timely response
Contingent Financing
of contingency plans
Capacity Building
for effective plan implementation
ETHIOPIA PHASE II – ETHIOPIA PHASE II – RISK MANAGEMENT FRAMEWORK RISK MANAGEMENT FRAMEWORK
II. Develop budgeted contingency plans
IV. Establish timely emergency financing through use of contingency financing
I. IMPROVED INDEX: LEAP
III. Build planning and implementation capacity at regional level
Early Warning System
with reliable baseline and trigger points
IMPROVED INDEX – IMPROVED INDEX – PART OF RISK MANAGEMENT FRAMEWORKPART OF RISK MANAGEMENT FRAMEWORK
I. IMPROVED INDEX: LEAP
Role of LEAP as a risk management Role of LEAP as a risk management frameworkframework
provide a good proxy estimate of the costs of protecting transient food insecure peoples’ livelihoods at the time of shock;
be an independent, objective, verifiable and replicable index of livelihood losses in the country;
convey information in near real-time to ensure that to the extent possible the response to livelihood crises will be more timely and effective.
Provide early warning of livelihood stress levels Signal amount of financial resources required
for livelihood protection at regional levels Crop and pasture monitoring