WFP: Insuring Against Famine - Part 2

In 2006, Richard Wilcox, Director of Business Planning at the World Food Programme, launched a drought insurance contract in the international financial market for Ethiopia, securing contingency funding to protect vulnerable populations against severe drought.

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[sunderwo]

In our case, MDA Federal, a US-based weather data company,played this role. All involved parties (AXA Re, WFP, and the government of Ethiopia) agreed that, in the event of a disagreement, the data confirmed by MDA Federal is the rainfall data to be used to determine the threshold level. MDA Federal supplies weather data to the Chicago Mercantile Exchange, and since its business therefore relies on its reputation, we can count on it to be an impartial arbitrator.

[sunderwo]

In order to avoid disagreements over the level of rainfallthreshold stipulated in the contract, it isstandard practice in the weather derivatives market to verify and confirmall rainfall data with an independent and disinterested third party.

[sunderwo]

WFP and AXA Re agreed, in advance, on the amount that AXA Re would pay and, in our contract, we stipulated that AXA Re would pay WFP up-front. The agreed-upon amount was based on the estimated financial loss that the relevant population was likely to incur and not the actual loss this population would have suffered. This avoids the time-consuming loss/damage assessments that must be carried out with traditional insurance policies.

[sunderwo]

Further, once the rainfall level was determined, AXA Re would pay WFP within a fixed number of days. Our contract covered a very specific event, lack of rainfall over a given area in Ethiopia. This is different from traditional household insurance that covers many things but also includes many exclusions. In our case, there was no ambiguity over what exactly the policy covered.

[sunderwo]

These are the very issues we wanted to avoid. So, although our transaction is often described as "insurance," what we actually entered into is a derivative contract. The derivative worked like this. In return for WFP paying AXA Re a fee (like an insurance premium), AXA Re agreed that for every millimetre of rainfall below a certain threshold, they would pay us a fixed amount of money up to a pre-determined maximum.

[sunderwo]

Thanks for your comments. You are right! Sometimes insurance companies decline claims if a particular event is not covered in the policy. Further, in order to make a claim, an insurance company and the person insured must agree on the loss that occurred.This can lead to time-consuming loss assessments and disagreements between the insurer and the insured.

[jus2enjoy]

Sometimes Ins. companies decline claims, take their case to court and get decission. How does the food insurer make the decision-hunger doesn`t give time to wait a court decission. As a profit oriented cpny the would be insurer will most likely try to decline claims-meaning ppl have to die..I am also afraid of possible interference of such company in development process of poor ctries..b/c dev`t means less dependence-> less market for the insurance company, right?