National Drought Insurance for Malawi

Malawi has experienced several catastrophic droughts over the past few decades. The impact of these shocks has been far reaching, and the resulting macroeconomic instability has been a major constraint to growth and poverty reduction in Malawi. This paper describes a weather risk management tool that has been developed to help the government manage the financial impact of drought-related national maize production shortfalls. The instrument is an index-based weather derivative contract designed to transfer the financial risk of severe and catastrophic national drought that adversely impacts the government's budget to the international risk markets. Because rainfall and maize yields are highly correlated, changes in rainfall -- its timing, cumulative amount, and distribution -- can act as an accurate proxy for maize losses. An index has been constructed using rainfall data from 23 weather stations throughout Malawi and uses daily rainfall as an input to predict maize yields and therefore production throughout the country. The index picks up the well documented historical drought events in 2005, 1995, 1994, and 1992 and a weather derivative contract based on such an index would have triggered timely cash payouts to the government in those years. This innovative risk management instrument was pioneered in 2008/2009 by the Government of Malawi, with the assistance of the World Bank, and was a first for a sovereign entity in Africa. Several piloting seasons will be necessary to understand the scope and limitations of such contracts, and their role in the government's strategy, contingency planning, and operational drought response framework.

Bibliographic Details

Main Authors:	Nucifora, Antonio, Syroka, Joanna
Language:	English en_US
Published:	World Bank, Washington, DC 2010-01
Subjects:	ACCOUNTING, ACTUAL COST, ADMINISTRATIVE COSTS, AGRICULTURAL PRODUCTION, ASSET MANAGEMENT, BANK INTERMEDIATION, BASIS RISK, BROKERAGE, CALL OPTION, CAPACITY BUILDING, CAPITAL MARKET, CHECKS, CLIMATE CHANGE, CLIMATE MONITORING, COMMODITY RISK MANAGEMENT, COMPETITIVE MARKET, CONTINGENCY PLAN, CONTINGENCY PLANNING, CONTINGENCY PLANS, COVERAGE, CRISES, DATA QUALITY, DEFICITS, DERIVATIVE CONTRACT, DERIVATIVE CONTRACTS, DERIVATIVE MARKET, DERIVATIVE TRANSACTION, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DISASTER, DISASTER AID, DISASTER RELIEF, DISASTER RESPONSE, DISASTER RISK, DISASTERS, DOMESTIC BORROWING, DROUGHT, DROUGHTS, EARLY WARNING, EARLY WARNING SYSTEM, ECONOMIC GROWTH, EMERGENCY FINANCING, EMERGENCY RELIEF, EMERGENCY RESPONSE, EMERGENCY RESPONSES, EMERGENCY SITUATIONS, EMPLOYMENT, ENTRY BARRIERS, EQUIPMENT, EXCHANGE RATE, EXPENDITURE, EXPENDITURES, FAMINE, FARMERS, FINANCIAL INSTRUMENT, FINANCIAL MARKETS, FINANCIAL RISK, FINANCIAL RISKS, FINANCIAL SAVINGS, FINANCING REQUIREMENTS, FISCAL DEFICIT, FLOODING, FLOODS, FOOD RELIEF, FOOD RESERVE, FOOD SECURITY, FOOD SHORTAGES, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVES, GLOBAL CLIMATE CHANGE, GLOBALIZATION, GOVERNANCE ISSUES, GOVERNMENT BORROWING, GOVERNMENT FINANCES, INCOME, INFLATION, INNOVATIONS, INSTRUMENT, INSURANCE, INSURANCE CONTRACT, INSURANCE CONTRACTS, INSURANCE MARKET, INSURANCE MARKETS, INSURANCE PREMIUM, INSURANCE PRODUCTS, INSURANCES, INTEREST COSTS, INTEREST PAYMENTS, INTERNATIONAL BANK, INTERNATIONAL DEVELOPMENT, INTERNATIONAL MARKET, INTERNATIONAL MARKETS, INVESTING, INVESTMENT DECISIONS, INVESTMENT STRATEGY, LEVEL OF CONFIDENCE, LEVEL OF RISK, MACROECONOMIC INSTABILITY, MACROECONOMIC STABILITY, MARKET ACCESS, MARKET ENTRY, MARKET PLAYERS, MARKET PRICE, METEOROLOGICAL ORGANIZATION, MITIGATION, NATURAL HAZARDS, OPPORTUNITY COSTS, PORTFOLIO, PORTFOLIOS, PREMIUMS, PRICE DISCOVERY, PRICE RISK, PRICE RISK MANAGEMENT, PRODUCTIVE INVESTMENTS, PROGRAMS, PUBLIC DEBT, PUBLIC FINANCES, RATES, RATING AGENCIES, REINSURANCE, REINSURER, RESERVE, RESERVE BANK, RESERVE FUND, RESERVES, RETURN, RISK MANAGEMENT, RISK MANAGEMENT STRATEGIES, RISK MANAGEMENT TOOL, RISK MANAGEMENT TOOLS, RISK MARKETS, RISK MITIGATION, RISK TRANSFER, SOVEREIGN ENTITY, SPOT MARKET, TECHNICAL ASSISTANCE, TELECOMMUNICATIONS, TRANSACTION, TREASURY, WEATHER DERIVATIVE,
Online Access:	http://documents.worldbank.org/curated/en/2010/01/11634487/national-drought-insurance-malawi https://hdl.handle.net/10986/19950
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