National Drought Insurance for Malawi

22 Pages Posted: 20 Apr 2016

See all articles by Joanna Syroka

Joanna Syroka

affiliation not provided to SSRN

Antonio Nucifora

World Bank - Africa

Date Written: January 1, 2010

Abstract

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.

Keywords: Debt Markets, Hazard Risk Management, Banks & Banking Reform, Labor Policies, Insurance & Risk Mitigation

Suggested Citation

Syroka, Joanna and Nucifora, Antonio, National Drought Insurance for Malawi (January 1, 2010). World Bank Policy Research Working Paper No. 5169. Available at SSRN: https://ssrn.com/abstract=1536982

Joanna Syroka

affiliation not provided to SSRN

Antonio Nucifora (Contact Author)

World Bank - Africa ( email )

1818 H Street
Washington, DC 20433
United States

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