'A drop in the bucket': by writing against the risk of drought and starvation, one reinsurer is offering both hope and self-reliance to a third world nation.

Earlier this year, French reinsurer Axa Re became the first carrier to offer insurance for humanitarian emergencies. The policy, a derivative contract based on a rainfall index, was taken out by Rome-based United Nations World Food Programme for its operations in Ethiopia.

For a premium of some $930,000, the contract provides up to $7.1 million should the country's crops fail due to insufficient rainfall.

"Our people in Rome saw this need. They did the analysis of how best to go about this, and they constructed the intellectual model," said WFP spokesman Trevor Rowe in New York.

Axa Re was chosen from a handful of reinsurers. "We are involved in weather risk and more specifically, on this transaction, because it diversifies Axa Re cat exposure," noted Jean-Christophe Garaix, weather covers underwriter with Axa Re in Paris.

The contract is based on a calibrated index of rainfall gathered from 26 weather stations across Ethiopia, Rowe explained. "If insufficient rain falls, then the policy is activated." Normally the WFP would have to wait until the harvest, to determine the need. The process of assessment and applying for aid prolongs receipt of any assistance for many months.

"Here we're talking about far in advance of harvest, when you see fight away if there's a drought or not, if there's a shortage of rainfall. You can act quickly and hopefully prevent people from eating their seed grains," Rowe said

WFP Risk Management Consultant Joanna Syroka in New York said the contract will save four-to-six months in relief time. "We're hoping that will really affect the lives of the people in Ethiopia," she said. Crops tracked by WFP include corn, sorghum, wheat and barley.

Predicting rainfall in Ethiopia depends not only on how much rain falls, but when. The contract payout is triggered by the amount of rain that falls from March to October, and the distribution of that rain.

In 2005, the "belg," or short rain, ended earlier than expected, and the "meher," or long rain, dropped more rain than usual, leaving many crops waterlogged and ruined.

Now frequent adjustments to the crop model via daily rainfall data allows WFP to predict what kind of crop production Ethiopian farmers can expect. The final piece of data is gathered after Oct. 31, and final calculations are done to see where the index lies. "If it's above the trigger, payment will be made; if not, no payment will be made," Syroka said.

The policy is paid out only in extreme risks, such as if both of Ethiopia's two rainy seasons fail. Normally, more than a billion dollars in aid would need to be generated by the Ethiopian government and through international aid because prolonging assistance exacerbates the problem. With the Axa Re contract, WFP would require at most $7.1 million, a mere "drop in the bucket" comparatively, Syroka said.

Thus far in 2006, the "belg" has been sufficient; the country now awaits a final tally of the "meher." "It's too early to say it's not going to be an extreme drought yet," Syroka cautioned. "June-to-July is the beginning of the extremely rainy season." Yet since the first rainy season was good, the possibility of payout this year is lower.

WFP expects to see a payout on the contract about once in every 10 years; the last extreme drought year for Ethiopia was in 2002.

As for Axa Re, Ethiopia is only the beginning. The company hopes to extend similar contracts to other developing nations through a macro approach, covering governments or international organizations, or a micro approach, directly covering farms (usually through a local insurance company).

"We are talking with governments, international organizations and local insurance companies to implement micro and macro structures in Africa and Central America," Garaix said.

ENSURING RELIEF: Axa Re's insurance product for humanitarian emergencies ensures that Ethiopians, like these boys from the village of Jara in the Boricha district, will have enough food to survive.