At the Workshop on Innovations in Index Insurance to Promote Agricultural and Livestock Development, December 3rd, 2015 in Addis Ababa Ethiopia, Andrew Mude of the International Livestock Research Institute presented on the challenges and promises of implementing index-based livestock insurance

1. Index Based Livestock Insurance
Toward Sustainable Livestock Insurance for Pastoralists
Innovations in Index Insurance to
Promote Agricultural and Livestock Development in Ethiopia
Addis, December 3, 2015

2. What we know about IBLI
• The (initial) IBLI contract – designed off
‘best-principles’ provides incomplete
cover due to considerable “basis risk”….
• …nonetheless, IBLI demonstrably
improves the lives of policy holders across
a range of socioeconomic and
psychological factors
• Provision of IBLI as part of a social
protection package could yield larger
impacts per cost than cash transfers alone
• Considerable evidence for proof of
concept; but demand still disappointingly
low.
Recap from Prof. Barrett’s presentation;
How to get to efficiently get to scale, sustainably?

3. COMPONENTS OF A SUSTAINABLE INDEX-INSURANCE PROGRAM
(or BARRIERS TO SCALE)
1. Index design: Data demands (long term series, reliable, non-
manipulable). Index precision (minimizing “basis risk”, maximizing value).
Contract design – matching index to risk profile.
2. Establish informed effective demand, especially among a clientele with
little experience with any insurance, but even for meso and macro actors.
Extension, capacity development, marketing.
3. Low cost, efficient, delivery mechanisms (supply chain), to build critical
mass of clients/recipients. Sales transactions platforms, information and
extension, indemnity payments
4. Policy and institutional infrastructure. Regulations, oversight, effective
coordination of public and private sector roles

4. COMPONENTS OF A SUSTAINABLE INDEX-INSURANCE PROGRAM
(or BARRIERS TO SCALE)
1. Index design: Data demands (long term series, reliable, non-
manipulable). Index precision (minimizing “basis risk”, maximizing value).
Contract design – matching index to risk profile.
2. Establish informed effective demand, especially among a clientele with
little experience with any insurance, but even for meso and macro actors.
Extension, capacity development, marketing.
3. Low cost, efficient, delivery mechanisms (supply chain), to build critical
mass of clients/recipients. Sales transactions platforms, information and
extension, indemnity payments
4. Policy and institutional infrastructure. Regulations, oversight, effective
coordination of public and private sector roles

5. First Index: Marsabit – January 2010 – January 2013
• Response Function: Regress historic livestock mortality data onto
transformations of Normalized Differenced Vegetation Index (NDVI) –
satellite-based proxy of forage availability
• IBLI Contract is for Asset Replacement: Pays out when forage scarcity is
predicted to cause livestock deaths in an area.
IBLI Index Design
Product performance
• Quality of prediction is highest for
more catastrophic drought events
• 85-88% accuracy for average herd
losses of at least 20%,
• Even with this subsequent study
calls contract precision into
question, “basis risk”
DATA
Response
Function Index
Chantarat, Mude, Barrett and Carter (2013, JRI)

6. Upgrading IBLI Model for Scale Out
• ALRMP Livestock Mortality Data – increasing gaps beyond Marsabit
• Employ spatial methods to estimate district/division-specific index
response functions
• Missing mortality observations will be filled in using spatial indexing scheme
• Spatial lag model of estimate optimal response function
IBLI Index Design
• Rolled Out in August 2013
• APA Insurance – Isiolo
• Takaful Insurance of Africa – Wajir
• Deficiencies in precision –
overestimated losses in March 2014
Woodard, Shee, Mude (2015, GPP accpeted

7. NDVI-based Forage Scarcity index
• Complexity of design, data scarcity, and precision concern resulted in a
move to NDVI-only contracts.
• Area-average seasonal availability of forage (NDVI) compared to historical seasons.
• First employed in Borena, S. Ethiopia from July 2012 by Oromia Insurance
Company (no livestock mortality data)
• Easier to explain, seemingly more precise, very easy to scale up
• Planned to transition in Kenya
• Fast-track due to demands of the Kenya Livestock Insurance Program
(KLIP) and collaboration with World Bank
• New Kenya Contract: Asset Protection – intervention prior to mortality
• Payout at the beginning of the dry season rather than the end
• Insured unit: cost to keep livestock alive during drought
• APA Insurance (Marsabit and Isiolo), Takaful Insurance of Africa (Wajir, Isiolo,
Mandera, Garissa) launched asset protection contracts in January 2015
• Greater attention to the science of remote sensing
IBLI Index Design
Vrieling, Meroni, Shee, Mude, Woodard, and de Bie Rambold (2014, IJAEOG)
Vrieling, Meroni, Mude, Chantarat, Ummenhofer and de Bie Kees(2015)

8. IBLI Contract Design – How to make the index suitable
Geographic Coverage – Delineating Index Units
• Should be representative of how the risk covered manifests itself in the production
system and for the target population.
• Must take into account operational, administrative and practical considerations.
Temporal Coverage – Setting out potential payout periods
• Dependent on the seasonality, production system, timing of risk impact and need
etc…
Fitting the index to the risk
• There are numerous ways to generate the index from NDVI (averaging across space,
cummulating across time, standardizing, filtering, ) and the various steps, and their
sequencing, have a bearing on the index reading and thus risk coverage
Pricing (Payout Structure, Payout Frequency)
• Risk coverage should be sufficient; reinsurance loadings need to be brought down
considerably; premium subsidy structure needs careful thought.
Contract design is the critical next step after index construction to ensure
effective risk coverage for the target population

9. Index and Contract Design
OUTSTANDING ISSUES AND RESEARCH QUESTIONS
• How can we improve the information content of remote sensing indicators beyond
biomass availability?
• Can new technologies help supporting the collection of ground truth/validation data?
• Can we find more efficient methods for index spatial and temporal aggregation to
improve the relationships with household level impacts, while keeping the approach
sufficiently general and understandable?
• How to guarantee long-term RS data continuity with changing Earth Observation
platforms and sensors?
HOW TO GUARANTEE OR ASSESS THE QUALITY OF INDEX INSURANCE PRODUCTS
• Growing proliferation of Index Insurance Products/Contracts. No clear signal of product
quality or risk-protection value (insurance or lottery).
• Lack of clear mechanism for distinguishing quality offers disincentive for designing high
value contract
Critical need for developing standard, universally accepted metrics for identifying and
signaling product quality (e.g., bond rating agency) (Jensen and Barrett, 2015 Working Paper)

10. COMPONENTS OF A SUSTAINABLE INDEX-INSURANCE PROGRAM
(or BARRIERS TO SCALE)
1. Index design: Data demands (long term series, reliable, non-
manipulable). Index precision (minimizing “basis risk”, maximizing value).
Contract design – matching index to risk profile.
2. Establish informed effective demand, especially among a clientele with
little experience with any insurance, but even for meso and macro actors.
Extension, capacity development, marketing.
3. Low cost, efficient, delivery mechanisms (supply chain), to build critical
mass of clients/recipients. Sales transactions platforms, information and
extension, indemnity payments
4. Policy and institutional infrastructure. Regulations, oversight, effective
coordination of public and private sector roles

11. Establishing Informed Effective Demand
TWO KEY ELEMENTS
Initial targeting of risk and program coverage areas are critical.
Are there credible reasons for expecting sufficient and scalable
demand?
Capacity Building, Training, Extension and Marketing. Need for
developing learning tools and building the capacity of the range of
service providers and stakeholders. Generating informed demand
requires product awareness and understanding.

12. Sounds like a good idea: Is it something pastoralists will really want, value or pay for?
Establishing Informed Effective Demand
Introduction to IBLI Using Experimental Games
• Innovative way to introduce novel and
complex concept to unfamiliar population
• Designed experimental game structured on
the pastoral production system
• Pastoralists were eager and game increased
understanding and confirmed to researchers
that it would be possible to explain
Investigating Demand and Willingness to Pay
• Survey, prior to and just after game to study
willingness to pay
• Preliminary results showed strong willingness
• Slightly more that 30% were willing to pay at least
the fair price of IBLI; wealthier hhs willing to pay
more.
• Study undertaking in 2008. Two worst drought
years in past two decades in 2009, and 2011
McPeak, Chantarat, and Mude (2010, AFR)
Chantarat, Mude, and Barrett (2009)

13. Pastoralists seem keen and willing: How to provision?
Establishing Informed Effective Demand
IBLI Institutions Feasibility Study
• How might IBLI complement or compete
with existing risk-management practices?
• Is the current institutional and policy
environment favourable to an IBLI-type
product/program.
• Efforts to understand the various
network of stakeholders and institutions
that would be relevant and willing
Rallying the troops
• Building a coalition of partners (insurance
companies, technical partners, GoK, donors,
NGOs….)
• Launch of pilot in Marsabit 2010
Matsaert, Kariuki and Mude (2011, DIP)

14. Establishing Informed Effective Demand
• To date, and increasingly so as index
insurance programs proliferate, selection of
program target locations has been largely
opportunistic.
• As increasing resources are applied, and to
increase the likelihood of sustainable
scaling, it may be necessary to move toward
impacts based targeting – strategic
selection of program development to target
areas with high likelihood of impact and
demand.
• General prerequisites for index insurance
product impact;
• Target population vulnerable to systematic,
quantifiable and covariate risk
• Risk is spatially correlated
• Available (or potentially available) insurance
and delivery infrastructure
(Jensen and Barrett, 2015 Cornell Working Paper)
Africa Classification for IBLI
“Relevance Zones”
(Mills et al., 2015 Cornell Working Paper)

15. Establishing Informed Effective Demand
CAPACITY DEVELOPMENT, TRAINING, EXTENSION, MARKETING
• Across the delivery chain – insurance underwriters, implementing partners,
government agencies, regulators, extension and sales agents, - need to have a clear
understanding of their roles, and to develop the capacities to execute them effectively
• Fundamentally, for sustainable scale, the client needs to understand the product and
trust the delivery mechanism.
IBLIs CAPACITY DEVELOPMENT STRATEGY
Level 1: Knowledge and tools for
government and insurance industry
policy makers
Level 2: Knowledge, skills and job aids for
IBLI/KLIP sales agents and promoters
Level 3: Awareness raising for potential
clients

16. Establishing Informed Effective Demand
Level 1: Knowledge and tools for
government and insurance industry policy
makers
IBLI Contract Design Tool
• Developed jointly with the WB for the
Kenya Government. Facilitates ease of
contract design parameterization and
historical assessment
• Automation and integration with other
contract development processes (index
calculation, information dissemination…)
would increase efficiencies.
Calculating Agent Functionality
• Supporting Celsius Pro to parameterize
KLIP contract
ELearning Platforms
• For a range of learning needs

17. Level 2: Knowledge, skills and job aids for
IBLI sales agents and KLIP promoters
Establishing Informed Effective Demand
Whole range of learning tools
• Training of trainers manuals, quick
reference guides, sales and marketing
tools
IBLI Interactive Classroom Curriculum
Web-based IBLI Curriculum (in progress)
IBLI Percentile Calculator
IBLI mobile learning application w/
gamification

18. Establishing Informed Effective Demand
• Radio talkback shows
• Extension videos
• Cartoons
• Posters
• Village barazas
• Village credit and savings groups
• Communications strategy review
being undertaken
Level 3: Awareness training for potential
clients

19. 1.1 Instructional design guide screen shots
Establishing Informed Effective Demand
IBLI Interactive Classroom Curriculum (Screen Shots)

20. 2.1 IBLI percentile calculator screen shots
Establishing Informed Effective Demand
IBLI Percentile Calculator (Screen Shots)

21. Other highlights
Establishing Informed Effective Demand
• Games / Gaming can be exciting and ‘sexy’, but unless
executed properly… one can lose much of the intended
and learning benefits
• Phase 2: Improve mlearning app and enhance
gamification components; include complementary
educational clips; test better hardware
M-LEARNING APP SCREEN SHOTS
Read more at:
http://www.slideshare.net/ILRI/ilri-panel-
lyons/14
• Experimental design looking at effects of
tradition training, mobile training, cash
incentives and gamification incentives

22. COMPONENTS OF A SUSTAINABLE INDEX-INSURANCE PROGRAM
(or BARRIERS TO SCALE)
1. Index design: Data demands (long term series, reliable, non-
manipulable). Index precision (minimizing “basis risk”, maximizing value).
Contract design – matching index to risk profile.
2. Establish informed effective demand, especially among a clientele with
little experience with any insurance, but even for meso and macro actors.
Extension, capacity development, marketing.
3. Low cost, efficient, delivery mechanisms (supply chain), to build critical
mass of clients/recipients. Sales transactions platforms, information and
extension, indemnity payments
4. Policy and institutional infrastructure. Regulations, oversight, effective
coordination of public and private sector roles

23. Low cost, efficient, delivery mechanisms
• Pastoralist rangelands offer quite a challenge for
delivery of the IBLI product (sparsely distributed
populations, deficiency of provision infrastructure
such mobile networks, agency outfits etc…)
• Transacting sales become very costly, even more so
payment of indemnities which can create problems of
trust etc.
• Developed mobile sales transactions applications
with back end MIS for both APA and Takaful.
• KLIP program leveraging provision of bank accounts
through HSNP program in Northern Kenya.
• Application of digital technological solutions will be
critical to reducing costs and going to scale
• Sales, even on the back of digital platforms will
require some agency. How to make required agent
structure sustainable?

24. Low cost, efficient, delivery mechanisms
To reach scale:
• will need to leverage technology to reduce the cost of product administration and
delivery
• Will need sufficient number of physical agents to effect sales, deliver information
and extension, and build product salience.
• Effective institutional mechanism for coordinating and regulating the contract
development and insurance provision system.

25. COMPONENTS OF A SUSTAINABLE INDEX-INSURANCE PROGRAM
(or BARRIERS TO SCALE)
1. Index design: Data demands (long term series, reliable, non-
manipulable). Index precision (minimizing “basis risk”, maximizing value).
Contract design – matching index to risk profile.
2. Establish informed effective demand, especially among a clientele with
little experience with any insurance, but even for meso and macro actors.
Extension, capacity development, marketing.
3. Low cost, efficient, delivery mechanisms (supply chain), to build critical
mass of clients/recipients. Sales transactions platforms, information and
extension, indemnity payments
4. Policy and institutional infrastructure. Regulations, oversight, effective
coordination of public and private sector roles

26. Policy and Institutional Infrastructure
• Sustainable, large-scale index insurance
program requires a clear and well articulated
policy structure
• No example of unsubsidized private market for
index insurance in developing countries.
Globally only 7% of transaction volume is
purely private.
• Experience and evidence suggests that for
programs to go to scale they need to build on
strong, well-coordinated public and private
sectors
• What are the key roles for each sector?

27. Policy and Institutional Infrastructure
Experience tends to suggest that implementation of agricultural
insurance is most efficient and effectively managed by the private
commercial agricultural sector
Product Design and
Development
Product development
Pricing
Data
Collect
Audit
Finance
Outreach
Innovative distribution
channels
Link to credit
Risk financing
Underwrite risk
Participation in co-
insurance pool

28. Policy and Institutional Infrastructure
… but that successfully scaled up agricultural insurance programs
typically require leadership and targeted support from government
Data
Collect
Audit
Manage
Finance
Outreach
Link to social safety nets
Link to credit
Premium subsidies
Awareness building
Risk Financing
Public sector reinsurance
Promote coinsurance pool
Support product design
and development
Product development
and pricing (short run)
Technical support for
insurers (long run)
Enabling environment
Institutional framework
Legal framework
Consumer protection
Financial support

29. Moving toward scale
• Growing body of evidence continues to highlight the
socioeconomic and risk-management value of index insurance
programs, and the logic of public support.
• IBLI experience has made a contribution to this evidence, and to
identifying some of the barriers to scale and trying to solve for
them
• Going to scale will require careful research and development
efforts to unlock the barriers, and an alignment of policy and
technological forces.
• This alignment looks like it is beginning o take place in Ethiopia
and appropriate stewardship of the key partners and institutions
in the public and private spheres seem poised to generate real
movement toward scale

30. For more information, visit http://ibli.ilri.org/
Thank you
Thank you for listening
THE IBLI PROGRAM IS A COLLABORATIVE EFFORT OF MANY PARTNERS

31. IBLI sales trends in Kenya- APA insurance company

32. IBLI sales trends in Kenya- Takaful insurance of Africa company

33. IBLI: Sales Trends- Oromia Insurance company