Expert Meeting – Requirements of Weather Markets WMO December 5, 2007 Ulrich Hess, Chief of Business Risk Planning Ulrich Hess, Chief of Business Risk Planning Drought Risk Management in Ethiopia – the big LEAP* *Livelihoods + Early Assessment + Protection

AGENDA Risk: Managing Risk instead of Managing Disasters Ethiopia Phase I: Pilot 2006 Ethiopia Phase II: Risk Management Framework

PROBLEM: TIMING and NATURE OF INTERVENTIONS E.g. Safety Net Areas - Highlands AugDecJan 2008 FebMarSept Crop+ Emergency Needs Assessment Emergency Appeal AprMayJuneJulyAug Life Saving Interventions (mostly food) NovOct

AugDec Jan 2008 FebMarSeptAprMayJuneJulyAug Enrolment of Beneficiaries Cash or food for work RATIONALE (I): EFFECTIVENESS - PROTECT LIVELIHOODS FIRST Example: Tigray, Ethiopia NovOct Funds disburse LEAP Index signals severe livelihood stress

Ethiopia Pilot Drought Insurance Transaction 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 TRANSACTION 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 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 – 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 – PART OF RISK MANAGEMENT FRAMEWORK I. IMPROVED INDEX: LEAP

Role of LEAP as a risk management framework  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

Livelihoods + Early Assessment + Protection: LEAP 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 parameters

Contingency Planning for appropriate and timely response RISK MANAGEMENT FRAMEWORK II. Develop budgeted contingency plans WFP COMPETENCY

III. 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 FRAMEWORK IV. Establish timely emergency financing through use of contingency financing WB + DFID (?) + WFP (?)

IV: INTEGRATED RISK FINANCING Occurrence (no. of years) Drought severity – Early Livelihood Protection costs ($US Mil) Insurance Contingency Grant/Fund/WFP CEMOP Flash Appeal Productive Safety Net 8.3 Mil Safety Net Beneficiaries7 Mil Livelihood Protection Target Beneficiaries

CONCLUSION: THIS IS IMPORTANT Destitution Dignity Cost Climate Change

THANKS! Ethiopia LEAP Tool download: Free software download. Please do not distribute without consent of WFP and World Bank For questions: