Protecting Pastoralists from the Risk of <br />Drought Related Livestock Mortality: Implementing Index Based Livestock Ins...
Managing Risk in the ASALs<br />Arid and Semi-Arid Lands (ASAL) residents, particularly in Northern Kenya, confront harsh ...
Impact of Drought on Livelihoods  <br /><ul><li>Livestock is both the principal asset and source of income for the vast ma...
Drought is the single greatest cause of livestock mortality
Most drought related livestock mortality occurs under severe conditions</li></ul>Proportion of total income by source<br /...
Insurance and Agricultural Development<br />Risk and shock of livestock mortality due to drought imposes considerable econ...
Index Based Insurance<br /><ul><li>New innovation in insurance avoids problems that make traditional insurance unprofitabl...
Policy holders paid based on external “index” that triggers indemnity payouts to all insured clients
Suited for risks affecting a large number of people simultaneously and for which a suitable index exists.
Advantages
No transactions costs of measuring individual losses
no moral hazard as no single individual can influence index.
Adverse selection does not matter as payouts do not depend on the riskiness of those who buy the insurance
Disadvantage
Problem of “basis” risk (gap between each individual’s actual loss and the index)</li></li></ul><li> The index<br />In des...
Need for a measure that is:
Highly correlated with livestock mortality
Reliably and cheaply available for wide range of locations
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Protecting Pastoralists from the Risk of Drought Related Livestock Mortality: Implementing Index Based Livestock Insurance in Northern Kenya

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

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Protecting Pastoralists from the Risk of Drought Related Livestock Mortality: Implementing Index Based Livestock Insurance in Northern Kenya

  1. 1. Protecting Pastoralists from the Risk of <br />Drought Related Livestock Mortality: Implementing Index Based Livestock Insurance <br />in Northern Kenya<br /> BRENDA WANDERA<br />International Livestock Research Institute (ILRI)<br />12th Annual Inter Agency Donor Group meeting, 10 -13 May 2011, Nairobi, Kenya<br />
  2. 2. Managing Risk in the ASALs<br />Arid and Semi-Arid Lands (ASAL) residents, particularly in Northern Kenya, confront harsh and volatile environments.<br />High level of risk:<br />Droughts, Diseases, Conflict<br />Low levels of capacity:<br />Infrastructure deficient<br />Few alternative livelihood<br /> opportunities<br />Livelihoods are primarily based <br /> on livestock<br />= A high degree of vulnerability to risk (esp. in the presence of poverty traps)<br />
  3. 3. Impact of Drought on Livelihoods <br /><ul><li>Livestock is both the principal asset and source of income for the vast majority of ASAL residents
  4. 4. Drought is the single greatest cause of livestock mortality
  5. 5. Most drought related livestock mortality occurs under severe conditions</li></ul>Proportion of total income by source<br />Livestock mortality by cause<br />
  6. 6. Insurance and Agricultural Development<br />Risk and shock of livestock mortality due to drought imposes considerable economic and welfare costs on pastoralists<br />Sustainable insurance can mitigate this risk and shock<br />But can insurance be sustainably offered in the ASALs?<br />Conventional insurance cannot be sustainable, especially in remote pastoral area such as Marsabit and Northern Kenya<br />Transactions costs<br />Moral hazard/adverse selection<br />
  7. 7. Index Based Insurance<br /><ul><li>New innovation in insurance avoids problems that make traditional insurance unprofitable for small and remote clients:
  8. 8. Policy holders paid based on external “index” that triggers indemnity payouts to all insured clients
  9. 9. Suited for risks affecting a large number of people simultaneously and for which a suitable index exists.
  10. 10. Advantages
  11. 11. No transactions costs of measuring individual losses
  12. 12. no moral hazard as no single individual can influence index.
  13. 13. Adverse selection does not matter as payouts do not depend on the riskiness of those who buy the insurance
  14. 14. Disadvantage
  15. 15. Problem of “basis” risk (gap between each individual’s actual loss and the index)</li></li></ul><li> The index<br />In designing an index<br /><ul><li>Need to model a relationship between the risk to be insured and the index  The Response Function
  16. 16. Need for a measure that is:
  17. 17. Highly correlated with livestock mortality
  18. 18. Reliably and cheaply available for wide range of locations
  19. 19. Historically available
  20. 20. The challenge of data availability</li></li></ul><li>Data<br />Deviation of NDVI from long-term average <br />February 2009, Dekad 3<br />NDVI February 2009, Dekad 3<br />Laisamis Cluster, zndvi (1982-2008)<br />Historical droughts<br />NASA NDVI Image Produced By: USGS-EROS Data Center. Source: Famine Early Warning System Network (FEWS-NET)<br />
  21. 21. Performance of Predicted Livestock Mortality Index<br />
  22. 22. Geographic Clusters<br /><ul><li> Estimate separate response functions for distinct geographic clusters due to differences in herd composition, grazing ranges, water access, etc.
  23. 23. Upper Marsabit (Chalbi)
  24. 24. Lower Marsabit (Laisamis)</li></li></ul><li>Temporal coverage of IBLI contract<br />
  25. 25. Risk coverage and pricing<br />Need to select an index strike point to trigger indemnity?<br />Trade off: Higher Strike  Lower Risk Coverage  Lower Cost<br />Conditional or Unconditional?<br />Payoff structure: Linear, Segmented, All or nothing, No claims bonus?<br />
  26. 26. Establishing informed effective demand<br />Insurance is a difficult concept to sell<br />Insurance is a foreign concept to relatively uninformed target<br />Initial significant investment in extension and marketing <br />Simulation games with real information and incentives<br />
  27. 27. From Theory to Practice<br />Impact Assessment<br />Does Index-Insurance deliver the social and economic benefits it promises?<br />Need a rigorous research design to allow quantification and attribution of impacts?<br />M&E to guide scale-up<br />
  28. 28. Challenges<br /><ul><li>Public private partnerships
  29. 29. Differences in mandate and incentives
  30. 30. Funding
  31. 31. Poor infrastructure
  32. 32. Product delivery
  33. 33. Information dissemination
  34. 34. Client education
  35. 35. Lack of experience with insurance and illiteracy
  36. 36. Costs</li></li></ul><li>Thank you.<br />For more information, please visit<br />www.ilri.org/ibli<br />
  37. 37. The Marsabit Pilot<br />Why Marsabit?<br />Pastoral production is a key livelihood facing a risk profile suitable for targeting with an index insurance product<br />Data availability affords precise contract design<br />Rich understanding of pastoral economy, seasonal herd dynamics of populations in Marsabit<br />Strong delivery partners and relationship with other key stakeholders on the ground<br />
  38. 38. Contract Premiums<br /><ul><li>Premiums for contract with trigger level 15%, providing annual coverage with two potential payout periods
  39. 39. 5.5% in Upper Marsabit
  40. 40. 3.25% in Lower Marsabit
  41. 41. 1 Tropical Livestock Unit (TLU) = 1 cattle = 0.7 camel = 10 goats/sheep values at Ksh 15,000
  42. 42. To insure 1 TLU for a year costs
  43. 43. 825 Ksh in Upper Marsabit
  44. 44. 487.5 Ksh in Lower Marsabit</li></li></ul><li>Contract Sales Jan/Feb 2010<br /><ul><li>High uptake
  45. 45. On average, small herd size (TLU) insured
  46. 46. Small size as business, need to grow
  47. 47. Lack of understanding or misunderstanding of the product </li>

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