Improving Humanitarian Response to Slow-Onset Disasters Using Famine Indexed Weather Derivatives

Abstract:     
This paper illustrates how weather derivatives indexed to forecasts of famine can be designed and used by operational agencies and donors to facilitate timely and reliable financing for effective emergency response to climate-based, slow-onset disasters such as drought. We provide a general framework for derivative contracts, especially in the context of index insurance and famine catastrophe bonds, and show how they can be used to complement existing tools and facilities in drought risk financing through a risk layering strategy. We use the case of arid lands of northern Kenya, where rainfall proves a strong predictor of widespread and severe child wasting, to provide a simple empirical illustration of the potential contract designs.

Keywords: Covariate risk, weather derivatives, catastrophe bond, famine relief, food aid, food insecurity, pastoralists, Kenya

Accepted Paper Series