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

Aug Dec Jan 2008

Feb MarSept

Crop+ Emergency Needs Assessment

Emergency Appeal

Apr May June July Aug

Life Saving Interventions (mostly food)

NovOct

Aug Dec Jan 2008

Feb MarSept Apr May June July Aug

Enrolment of Beneficiaries Cash or food for work

RATIONALE (I): EFFECTIVENESS - PROTECT RATIONALE (I): EFFECTIVENESS - PROTECT LIVELIHOODS FIRSTLIVELIHOODS FIRST

Example: Tigray, EthiopiaExample: Tigray, Ethiopia

NovOct

Funds disburse

LEAP Index signals severe

livelihood stress

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

LLivelihoods + ivelihoods + EEarly arly AAssessment ssessment + + PProtection:rotection: LEAP INDICESLEAP INDICES

Costs (Livelihood Protection

Cost Index LPCI)

Livelihood Protection Beneficiaries

Water Requirement Satisfaction

Index (WRSI)

for Crops + Rangelands

Weather data Crop + soil coefficients

• Objective: capture livelihood protection funding needs at regional level

• Target group: vulnerable population

Viewing output parametersViewing output parameters

Contingency Planning

for appropriate and timely response

RISK MANAGEMENT RISK MANAGEMENT FRAMEWORKFRAMEWORK

II. Develop budgeted contingency plans

WFP COMPETENCY

III. CAPACITY BUILDING + OWNERSHIPIII. CAPACITY BUILDING + OWNERSHIP• Government and development partners agreed

that the index should be developed with participation of all stakeholders.

• A Technical Steering Committee chaired by FSCB, was established to oversee the implementation of phase II of the project.

• Training of Government (MOARD, NMA, and FSCB staff) on the LEAP software package was done in June and October.

• A concept note and project proposal for LEAP development and endorsed by the Technical Steering Committee.

• The phase II was funded jointly by the Government, WFP, the World Bank and FAO.

Contingency Financing

of contingency plans

RISK MANAGEMENT RISK MANAGEMENT FRAMEWORKFRAMEWORK

IV. Establish timely emergency financing through use of contingency financing

WB + DFID (?) + WFP (?)

IV: INTEGRATED RISK IV: INTEGRATED RISK FINANCINGFINANCING

Occ

urr

ence

(n

o. o

f ye

ars)

0

2

4

6

8

10

12

14

16

18

0 0 0 0 30 60 90 120 150 180

Early Livelihood protection costs ($US million)

Num

ber

of y

ears

by

drou

ght s

ever

ity

CATASTROPHIC DROUGHTMILD DROUGHTNO DROUGHT

0

2

4

6

8

10

12

14

16

18

0 0 0 0 30 60 90 120 150 180

Early Livelihood protection costs ($US million)

Num

ber

of y

ears

by

drou

ght s

ever

ity

CATASTROPHIC DROUGHTMILD DROUGHTNO DROUGHT

Drought severity – Early Livelihood Protection costs ($US Mil)

InsuranceContingency Grant/Fund/WFP CEMOP

Flash AppealProductive Safety Net

8.3 Mil Safety Net Beneficiaries 7 Mil Livelihood Protection Target Beneficiaries

CONCLUSION: THIS IS CONCLUSION: THIS IS IMPORTANTIMPORTANT

• Destitution

• Dignity

• Cost

• Climate Change

THANKS!THANKS!

• Ethiopia LEAP Tool download:

http://vam.wfp.org/LEAP

Free software download. Please do not distribute without consent of WFP and World Bank

• For questions: elliot.vhurumuku@wfp.org, ulrich.hess@wfp.org,