Presented by Brenda Wandera (ILRI) to the 12th Inter-Agency Donor Group Meeting, Nairobi, Kenya, 0-13 May 2011

1. Protecting Pastoralists from the Risk of Drought Related Livestock Mortality: Implementing Index Based Livestock Insurance in Northern Kenya BRENDA WANDERA International Livestock Research Institute (ILRI) 12th Annual Inter Agency Donor Group meeting, 10 -13 May 2011, Nairobi, Kenya

2. Managing Risk in the ASALs Arid and Semi-Arid Lands (ASAL) residents, particularly in Northern Kenya, confront harsh and volatile environments. High level of risk: Droughts, Diseases, Conflict Low levels of capacity: Infrastructure deficient Few alternative livelihood opportunities Livelihoods are primarily based on livestock = A high degree of vulnerability to risk (esp. in the presence of poverty traps)

4. Drought is the single greatest cause of livestock mortality

5. Most drought related livestock mortality occurs under severe conditionsProportion of total income by source Livestock mortality by cause

6. Insurance and Agricultural Development Risk and shock of livestock mortality due to drought imposes considerable economic and welfare costs on pastoralists Sustainable insurance can mitigate this risk and shock But can insurance be sustainably offered in the ASALs? Conventional insurance cannot be sustainable, especially in remote pastoral area such as Marsabit and Northern Kenya Transactions costs Moral hazard/adverse selection

8. Policy holders paid based on external “index” that triggers indemnity payouts to all insured clients

9. Suited for risks affecting a large number of people simultaneously and for which a suitable index exists.

10. Advantages

11. No transactions costs of measuring individual losses

12. no moral hazard as no single individual can influence index.

13. Adverse selection does not matter as payouts do not depend on the riskiness of those who buy the insurance

14. Disadvantage

16. Need for a measure that is:

17. Highly correlated with livestock mortality

18. Reliably and cheaply available for wide range of locations

19. Historically available

21. Performance of Predicted Livestock Mortality Index

23. Upper Marsabit (Chalbi)

25. Risk coverage and pricing Need to select an index strike point to trigger indemnity? Trade off: Higher Strike  Lower Risk Coverage  Lower Cost Conditional or Unconditional? Payoff structure: Linear, Segmented, All or nothing, No claims bonus?

26. Establishing informed effective demand Insurance is a difficult concept to sell Insurance is a foreign concept to relatively uninformed target Initial significant investment in extension and marketing Simulation games with real information and incentives

27. From Theory to Practice Impact Assessment Does Index-Insurance deliver the social and economic benefits it promises? Need a rigorous research design to allow quantification and attribution of impacts? M&E to guide scale-up

29. Differences in mandate and incentives

30. Funding

31. Poor infrastructure

32. Product delivery

33. Information dissemination

34. Client education

35. Lack of experience with insurance and illiteracy

37. The Marsabit Pilot Why Marsabit? Pastoral production is a key livelihood facing a risk profile suitable for targeting with an index insurance product Data availability affords precise contract design Rich understanding of pastoral economy, seasonal herd dynamics of populations in Marsabit Strong delivery partners and relationship with other key stakeholders on the ground

39. 5.5% in Upper Marsabit

40. 3.25% in Lower Marsabit

41. 1 Tropical Livestock Unit (TLU) = 1 cattle = 0.7 camel = 10 goats/sheep values at Ksh 15,000

42. To insure 1 TLU for a year costs

43. 825 Ksh in Upper Marsabit

45. On average, small herd size (TLU) insured

46. Small size as business, need to grow

47. Lack of understanding or misunderstanding of the product