The United Nation's World Food Programme is the first international humanitarian agency to tap into the evolving weather derivatives market with a $1 million policy from AXA Re, which will pay out if the rainfall in areas of Ethiopia falls below a prescribed level.

"The idea is to make sure the family doesn't deplete its assets and sell off their livestock," says Ulrich Hess, chief of business risk planning at the global food agency's headquarters in Rome. "We want to give people enough to buy food and keep their children in school and keep going."

Analysts say the development of the weather derivatives market and parametric risk modeling over the past decade has opened up a window of opportunity for humanitarian agencies and developing countries, as insurers get a chance to spread their risks to new parts of the globe.

"It's a way to manage the risk of humanitarian problems prospectively," says Warren Isom, a senior vice president at Willis Re, "to look at these risks through the risk management lens rather than a humanitarian lens." And as relief agencies slowly transform their outlook on how to secure trading for handling disasters from droughts to earthquakes, insurers and reinsurers can shift their catastrophic risks outside traditional areas such as the hurricane-prone East Coast of the United States or the tumultuous earthquake zones of Japan.

"Spread is important in catastrophic insurance, and right now these low-frequency, high-severity risks occur in a relatively small number of places," says Isom, citing Northern Europe, the West Coast and Mexico as other locales. "This gives the market some more spread."

And this diffusion is exactly what enticed AXA Re.

"We saw this as a way to diversify our risk into an area where we have no exposure," says Jean-Christophe Garaix, who's in charge of weather coverage at AXA Re, part of the Paris-based AXA Group. Right now, most of the French reinsurers risk lies in the United States, Europe and Japan.

At the same time, developing countries--if armed with insurance coverage against perennial natural disasters like drought, floods, windstorms or earthquakes--could benefit by gaining more economic stability.

"This can provide a more stable environment for investment and economic growth," says Brian Tobben, vice president of weather at PartnerRe Ltd. in Greenwich, Conn. "Aid can save lives, but this type of mechanism can also help build an overall economy."

Analysts agree the index-based products aren't able to cover the cost of food or housing for people displaced by manmade disasters, such as civil conflicts that turn citizens into refugees in their own country or send them fleeing across borders. The absence of a measurable, objective criteria in such scenarios--such as low rainfall or rising water levels--would create an underwriting nightmare.

"There's no index for civil conflicts ... so there would be no market for that type of insurance," says Hess of the WFP.

But the development of data-sensitive insurance products has created a small success story for the U.N. food agency as it fights poverty and hunger in Ethiopia.

"It's a new concept ... parametric-based instruments that use risk-modeling techniques. You can understand what the risk is and how to price it," says Eugene Gurenko, lead financial services specialist for the World Bank in Washington, D.C. "It provides objective verification."

That's exactly what persuaded AXA Re to assume the risk.

"In Africa, it's not very easy to have good data. But this let us define what the risk is and gave us precise data," says Garaix, adding that the company reviewed decades of Ethiopia's weather history to determine no trends existed. "We have no expectations ... negative or positive."

So 26 weather stations spread around this northeastern African nation of nearly 75 million people, except for southern areas close to Somalia, will be monitoring rainfall dining the two rainy seasons that run from March 10 to Oct. 31. If rainfall dips below a certain level at the end of the covered period, the policy will pay out $100, in the form of cash or food, to each affected household in the drought-stricken area.

The annual premium of nearly $1 million was financed with a $930,000 grant from the U.S. Agency for International Development. The payout could tally $7.1 million if all 67,000 households were impacted by drought. The local branches of USAID and WFP will oversee the distribution of any claims by the Ethiopian government's food security bureau.

By having an insurance mechanism in place, Ethiopia can distribute relief to farmers in a smooth manner and avoid waiting for humanitarian agencies to gather funds from donor countries, which sometime supply aid with unwanted strings attached, Hess says.

"This is a way for countries like Ethiopia to get out of the food-aid business and to have the money in people's hands within a few days," Hess adds.