Swiss Re has agreed to pay out up to $5 million to back a weather derivative contract between the International Development Association (IDA) and the government of Malawi.

Under its contract with the IDA, an arm of the World Bank that helps poor countries, Swiss Re said it will pay up to $5 million in the event that Malawi's farmers suffer from a drought-related shortfall in maize production.

The IDA-Malawi contract is structured "as an option on a rainfall index," Swiss Re said. The index reflects the value of the projected loss in maize production if precipitation falls below a certain level, and the maximum payout is reached if maize production drops to 10 percent below the historical average.

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