Insurance is helping to break the poverty cycle in Africa through a new product offsetting drought in Kenya, Mali and Ethiopia.

Global reinsurer Swiss Re says new drought policies are providing financial security for three African villages under the auspices of non-profit group Millennium Promise Alliance.

Under the derivative contract, villages in Kenya, Mali and Ethiopia will be eligible to claim up to $US2 million ($2.4 million) in cases of extreme drought.

The flagship program, Millennium Villages, helps nearly 80 villages across 10 African countries to build self-sustaining communities.

Swiss Re's involvement in developing African communities is believed to be the first time a non-profit group has taken out insurance to offset the risk of weather variability.

Head of Sustainability and Emerging Risk Management Ivo Menzinger says insurance is becoming an important tool in managing weather risks in Third World countries.

"Insurance and access to credit are crucial elements to lift smallholder farmers out of the poverty trap," he said. "With climate change expected to exacerbate weather risks, particularly in developing countries, innovative financial instruments for rural communities are urgently needed."