Swiss Re, IDA Contract Protects Against Drought In Malawi

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.

Gloria Grandolini, director of the World Bank Treasury's Banking and Debt Management Department, said: "This weather derivative contract is just one instrument as part of a World Bank effort to deliver customized financial solutions and help members plan efficient responses to catastrophic events. The use of weather derivatives are most effective as part of a broader risk management strategy."

Speaking to Swiss Re's contract with the IDA, Juerg Trueb, Swiss Re's head of Environmental and Commodity Markets, said, "The weather derivative contract with the World Bank is a prime example of an ex-ante disaster risk management strategy designed to mitigate the financial impact of drought for a country such as Malawi that is heavily dependent upon the income from its agricultural production."

He added, "The execution of the contract between the World Bank and Swiss Re demonstrates the ability and the interest of the international risk transfer markets to absorb such risks."