Using weather index insurance to improve drought response for famine prevention

Abstract

How donors and operational agencies might use weather index insurance for famine prevention, enumerate key prospective benefits from such products, and then illustrates the possibilities with an application to the arid lands of northern Kenya has been outlined. Designing weather index insurance to facilitate financing of drought-related humanitarian response appears attractive. Two ways can be done. The first is a simple put option based on cumulative long rains and/or cumulative short rains-appropriately weighted across rainfall sites as a weather index. This may pay out some predetermined sum per mm shortfall of seasonal cumulative rainfall relative to a contractually established threshold at the end of the contract term for each season. The second design exploits the apparent ability to forecast famine based on rainfall several months ahead. One can use a validated forecasting model to establish the rainfall level below which the expected future prevalence of child wasting equals or exceeds 20%, thereby triggering indemnity payments under the insurance contract. Show more