Swiss Re, the Earth Institute at Columbia University and the Millennium Promise Alliance have pioneered weather derivative contracts protecting smallholder farmers against drought-related livelihood shocks such as food shortages and famines in several villages in Kenya, Mali and Ethiopia.
<p>Working off the climate model developed by the Earth Institute's International Research Institute for Climate and Society, the three companies successfully designed and implemented innovative weather risk transfer solutions covering drought-related food shortages in three village clusters situated in Sauri (Kenya), Tiby (Mali) and Koraro (Ethiopia).<br /><br />Under the terms of the new cover, Swiss Re will provide up to $2 million of financial protection in the event of extreme drought. It is expected that around 150,000 people will benefit from the coverage.<br /><br />Tailored insurance or derivative contracts are becoming an increasingly important instrument for managing weather-related risks in emerging markets. In the case of the three African village clusters covered, for the first time ever, a non-profit organization complements its existing initiatives in its fight for sustainable development with financial risk transfer instruments designed to mitigate the consequences of weather variability. The payout of these financial instruments is based on information derived from a blend of satellite and weather data used as an objective proxy for staple crop production in the three village clusters. <br /><br />Juerg Trueb, Swiss Re's head of environmental and commodity markets, commented: This project is an important milestone in our attempt to adapt and deploy advanced risk management and financial market instruments for the benefit of the agricultural sector in developing markets.</p>