Humanitarian disaster insurance?

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The UN World Food Program has announced the world’s first insurance contract for humanitarian emergencies. Specifically, the contract hedges the risk of an extreme drought during Ethiopia’s next agricultural season.

The policy, which costs $930,000, is designed to create a way of financing natural disaster aid. Instead of waiting for drought to hit and for people to suffer and then pursuing money from donors to respond, the World Food Program has crunched the numbers from past droughts and taken out insurance on the income losses that Ethiopian farmers would face should the rains fail. If the rainfall measured at 26 weather stations around Ethiopia falls below a certain level between March and October, AXA Re, a large French insurer, will pay up to $7.1 million.

The hope is that such mechanisms would ensure that disaster aid gets mobilized faster, stimulate some creative thinking on how to improve emergency aid, shift risks from farmers to financiers, and allow insurers to diversify their portfolios. More via ReliefWeb.

Update: Felix Salmon and Owen Barder sound in.

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