Using weather index insurance to improve drought response for famine prevention.

Third, index insurance would permit an improved and immediate link between emergency response and recipient need. With most emergency response still based on the provision of food aid that remains tied to procurement, processing, and shipment from donor countries, drought response for famine prevention remains doubly tied: to food as the primary form of response and to donor countries as the primary source of that food. Indeed, a common quip in Ethiopia is that the availability of food aid depends not on whether it rains locally, but on whether it rains in North America. Put differently, the supply of food aid--which is a complex function of donor country harvests and farm support policies, global prices, freight costs, geopolitics, etc.--remains as important a determinant of food aid deliveries as is the need of at-risk populations. This is partly reflected in figure 1, which plots rainfall realizations in the three northern Kenya districts we study (Marsabit, Samburu, Turkana) against the value of World Food Programme (WFP) food aid deliveries into Kenya. (2) Over the period 1991-2006, this relationship was quite weak ([r.sup.2] = 0.067 on the best fit, single log specification), and the difference between annual food aid flows in the wettest and driest years in this period was only $4 million (16% higher in the drier year) even though rainfall volumes in the better year were 334% greater than those in the driest year. Current food aid programs are not responsive enough to drought shocks, at least partly due to supply-side obstacles that could be reduced via the proposed weather index insurance, which links cash payouts entirely to predicted humanitarian need.

Fourth, timely and adequate funding are huge obstacles to effective response to slow-onset disasters, such as drought. The United Nations' Consolidated Appeal Process (CAP) attempts to coordinate global cooperation in emergency response. On average, however, funds raised via CAP amounted to only 56% of requirements by the end of October in 2003-2006 (OCHA). WFP Emergency Operations (EMOP) covers the majority of the humanitarian response, especially related to food security and famine prevention. While WFP's experience is better than that of the CAR it too suffers significant shortfalls and delays. On average, only 70% of EMOP funding needs were provided by donors in 2001-2006, ranging from 57% in 2005 to 79% in 2004, and each year, only an average of 36% of EMOP needs were confirmed for donors' contributions by the beginning of June for early intervention with as low as 22% need fulfillment in mid-2004 (WFP). Moreover, donor contributions take months to arrive. For example, the median response time for U.S. emergency food aid is just under five months from the filing of a formal request (a "call forward") to port delivery (Barrett and Maxwell 2005). Delays are costly, even deadly. As an emergency progresses, unit costs per beneficiary increase sharply as more expensive, processed commodities become increasingly needed for therapeutic feeding, donors pay premium for faster transport (including airlift), and populations migrate to camps where broader support costs (e.g., shelter, water, medical care) become essential. Moreover, late-arriving assistance often fails to protect the livelihoods of affected populations, who often must deplete their productive asset stocks or migrate in response to the shock, which in turn makes them more vulnerable to future shocks.

In spite of significant improvements in early warning systems, supply chain management and other key response functions, operational agency interventions continue to lag behind global media reporting on disasters. The 2004-2005 Niger emergency provides a disturbing example. After a November 2004 international appeal by the Government of Niger and the United Nations, WFP's initial food deliveries in February 2005 cost $7 per beneficiary. But global response was anemic. In June 2005, the Niger situation was relabeled an "emergency," and graphic global media coverage in July-August led to a sizable, but slow, global response. The cost per beneficiary for WFP's August deliveries--that is, the same delivery organization, but with badly delayed response--had risen to $23, more than three times the cost six months earlier, due to far greater need for supplemental and therapeutic foods instead of cheaper, bulk commodities, and the need for airlift and other quicker, but more expensive logistics. By enabling rapid payout when the trigger is reached rather than merely starting an appeals process likely to drag on for months and be only partly filled, weather insurance can substantially reduce drought response costs and provide greater asset protection to affected peoples.

Finally, because index insurance is based on the realization of a specific-event outcome that cannot be influenced by insurers or policyholders (e.g., the amount and distribution of rainfall over a season), it has a relatively simple and transparent structure. This makes such products easier to understand and consequently to design, develop, and trade, potentially opening up new sources of finance for emergency drought response and famine prevention. The apparent success of pilot programs conducted in India, Malawi, Mexico, Mongolia, and various other countries has established the feasibility and affordability of such products (World Bank 2005). Weather insurance contracts underwritten by domestic insurers and reinsured or underwritten directly by international investors can provide a new and cost-effective means to transfer low-probability, high-consequence covariate weather risks to global markets where those risks can be easily pooled and diversified as part of global portfolios. If rainfall volumes provide a strong predictive signal of imminent famine, and thus of looming financing needs for emergency drought response, the opportunity exists to design weather insurance to facilitate more effective aid response. This opportunity should be seized.

Rainfall and Famine in Northern Kenya: The Potential of Weather Index Insurance

The arid areas of northern Kenya are largely populated by marginalized pastoral and agro-pastoral populations that traditionally rely on extensive livestock production for their livelihood. We focus on three districts--Turkana, Samburu, and Marsabit--not only because they are the three districts rated most vulnerable to food insecurity, but also because they share similar socioeconomic characteristics, climate patterns, natural resource endowments, and livelihood portfolios which allows us to apply similar concepts and tools to drought response across this vast area.

The unpredictability of rainfall heavily affects livelihood returns and welfare dynamics in pastoral communities. To observe such dynamics, Mude et al. (2006) generated community-level summary statistics of repeated cross-sectional household data collected monthly in 45 communities in these three districts from 2000-2005 by the Government of Kenya's Arid Lands Resources Management Project (ALRMP), which resides within the Office of the President, underscoring the importance of drought response in these regions. The key dependent variable is the proportion of children aged 6-59 months in each community with recorded MUAC z-score [less than or equal to] -2.

Mude et al. (2006) matched the ALRMP data with forage availability data from the USAID Global Livestock CRSP livestock early warning system (LEWS) and livestock information network and knowledge system (LINKS) project, and with METEOSAT-based rainfall series, 1961-2006, from 21 geographically distinct sites in these three districts. While floods occur and cause major losses, the primary weather-related risk in these districts is severe drought. Rainfall is generally bimodal, characterized by long rains that fall from March through May and short rains from October through December. Rainfall is also highly correlated across space in these districts. Table 1 displays the bivariate correlation coefficients of mean district-level cumulative seasonal rainfall, 1961-2006, with the long rains on the lower diagonal and the short rains on the upper diagonal. The high correlations among these series--all are statistically significantly different from zero at the one percent level-signal limited weather risk pooling potential in northern Kenya, hence the need for outside assistance when severe droughts strike.

Pastoralists rely on both rains for water and pasture for their animals, as well as occasional dryland cropping. In a normal year, water availability suffices to ensure adequate yields of milk, meat and blood, most of which is consumed within pastoral households, with the rest sold in order to purchase grains and non-food necessities. Localized rain failures may happen, but migratory herders can commonly adapt to spatiotemporal variability in forage and water availability. But when the rains fail across a wide area, especially if short and long rains both fail in succession, catastrophic herd losses often occur and bring with them severe human deprivation manifest in, among other indicators, more prevalent severe child wasting.