portion of the program, without World Bank intermediation, after several years of successful risk transfer.<sup>15</sup> In terms of timing, the derivative itself was purchased in October 2008, following counterparty selection through a competitive process led by the World Bank Treasury in August 2008.<sup>16</sup> Given the small size of the transaction and the other financial risk management strategies available to the government at the time, the weather derivative was designed to secure early maize imports. Timely purchases are essential to avoid huge volatility in grain prices and prevent the dislocation caused by severe shortages, while funds are mobilized to support the full disaster response. In the event of severe drought, a payout would have occurred in early May 2009 which would have been used to purchase a contingent maize import agreement<sup>17</sup> to speed maize into the country in a managed way.<sup>18</sup> In fact, in 2008/2009 the rains were good and no payout was made in May 2009. Nonetheless, this transaction successfully tested the capacity of the Malawi Meteorological Services to transfer rainfall data in real-time to the standards required to the international market, and allowed the government ministries to become familiar with the legal and technical requirements of such agreements.

Several piloting seasons beyond an initial phase will be necessary to fully grasp the role and flexibility of weather risk management instruments within the government’s strategy, and operational drought response as its national disaster risk management framework evolves.<sup>19</sup> The first pilot provided a foundation for continuing to manage catastrophic drought risks through insurance mechanisms. In addition, as future investments in the Malawi Meteorological Services and crop modeling are made<sup>20</sup> , the risk transfer index itself will improve along with the government’s familiarity with the tool.

15 This takes the form of training visits from World Bank experts involved with all aspects of the transaction. There is also scope within the new World Bank Agricultural Development Programme Support Project to support training, capacity building and study tours for key Government stakeholders to secure local understanding and ownership of the contracting process.

16 Swiss Re was selected to be the counterparty to the 2008/2009 transaction. On October 20, 2008, Swiss Re announced that it had entered into a weather derivative contract with the International Development Association (IDA), the arm of the World Bank that helps the world’s poorest countries. Under the terms of the contract, Swiss Re would pay out up to US$5 million in the event that Malawi’s farmers suffer from a drought-related shortfall in maize production.

http://www.swissre.com/pws/media%20centre/news/news%20releases%202008/mi_ida_20081020.html 17 In September 2005 the Government of Malawi, with technical assistance from the World Bank, piloted the used of a call option linked to the South Africa Future Exchange (SAFEX) white maize prices to cap the price of maize imports from South Africa for 60,000 MT of maize (see Slater and Dana, 2006).

18 In this context, the World Bank is assisting the Government of Malawi to explicitly link the weather derivative to a broader price risk management strategy, which automatically places the weather derivative contract within the context of a broader risk management program (to strengthen the response of maize markets to production shortfalls).

19 DFID earmarked funds to continue contributing to premium costs for the next agricultural seasons. Other donor also signaled their interest in supporting the program.

20 Investments in the observing and measurement infrastructure of Malawi’s Department of Climate Change and Meteorological Services (MMS) are necessary to improve the reliability of the index and the Government’s early warning system. The Government has made provisions to invest in the MMS’s weather observing network and in crop modeling knowledge and capacity in the country through the new Agricultural Development Programme Support Project. Investments in weather stations and their communication have many benefits for Malawi and the region including: better weather forecasting and climate monitoring, enhanced national agricultural and irrigation planning and of course, strengthened national maize early warning system (together with improved crop modeling 16