“Livestock Insurance Schemes:demand for and application by small    holders and pastoralists”.*                  Wyn Richa...
Poverty and Insurance• Risk and poverty are inextricably linked• Susceptibility to risk is a defining feature of what  it ...
Market research• 97% of the poor have no access to insurance.• Insurance companies wary of insuring the poor; conventional...
Reaction and consequences of shocks• Households lose income, resilience, assets (and  their lives).• They cut back on cons...
Types of insurable risk• Classification based on whether they affect a  large population(covariate risk) and their  freque...
Who can help poor farmers share risk?•   Government-run social protection schemes that protect the poorest households    a...
Insurance as a business• Sustainable and affordable insurance schemes depend on  satisfying the basic equation            ...
Financial performance of conventional crop              insurance programmes in 6 countries****** Skees et al 1999        ...
Livestock Losses• As a proverb in the Horn of Africa goes: if the animals die, then  the people will die too. Ca.1 billion...
Different livestock insurance schemesType of Livestock Insurance                Description                               ...
More on index-based insurance schemes•    They allow farmers to protect themselves against catastrophic agricultural    pr...
Specific Lessons on Index-based Livestock Insurance                  IBLI – pros, challenges and solutions (mostly from Ba...
2. Challenges to sustainable IBLI                          Solutions to challengesHigh quality data (reliable, timely, non...
Generic lessons learned from review.It is best to offer poor livestock keepers a package of rural financial services rathe...
A basic guide to implementing livestock insuranceUnderstand the target audience, identify the specific risks for which ins...
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Livestock Insurance Schemes: Demand for and Application by Small holders and Pastoralists

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Presentation from the Livestock Inter-Agency Donor Group (IADG) Meeting 2010. 4-5 May 2010 Italy, Rome IFAD Headquarters.

The event involved approximately 45 representatives from the international partner agencies to discuss critical needs for livestock development and research issues for the coming decade.

[ Originally posted on http://www.cop-ppld.net/cop_knowledge_base ]

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Livestock Insurance Schemes: Demand for and Application by Small holders and Pastoralists

  1. 1. “Livestock Insurance Schemes:demand for and application by small holders and pastoralists”.* Wyn Richards Livestock Development Practice UK * Based on a review funded by IFAD CoP-PPLD. 1
  2. 2. Poverty and Insurance• Risk and poverty are inextricably linked• Susceptibility to risk is a defining feature of what it means to be poor – and it is the poorest who have the fewest tools to cope with the effects of weather(drought, floods) disease, conflict etc.• Breaking the link between risk and poverty by insuring poor people lessens poverty, increases resilience and enables them to take part in income growth. 2
  3. 3. Market research• 97% of the poor have no access to insurance.• Insurance companies wary of insuring the poor; conventional policies have high transaction costs. Need for new ‘fit for purpose policies’ for the poor. Interest increasing rapidly; yet it is very hard to sell insurance to the poor- difficult concept.• Principal insurance interests of the poor are for: i)Health –highest demand but hardest to provide. 24% of those entering hospital leave totally impoverished due to costs involved. In India, 1.7 million poor people pay $8pa for $500 medical cover. ii)Life -funeral expenses often account for 3-6 months income each year for the poor. iii)Property/assets – including crops/livestock. Largely based on individual losses and covered traditionally by informal mechanisms. iv)Weather – without formal insurance, smallholder farmers (0.5-3ha) are perceived as a bad risk by Banks and other FIs . 3
  4. 4. Reaction and consequences of shocks• Households lose income, resilience, assets (and their lives).• They cut back on consumption, reduce investments in education, sell productive assets such as land and livestock, borrow from relatives and friends, seek employment, migrate.• They reduce risky new ventures which might prove profitable in favour of retaining as many assets as possible in easily disposable forms – so perpetuating their poverty. 4
  5. 5. Types of insurable risk• Classification based on whether they affect a large population(covariate risk) and their frequency, or individual risk.• Standard insurance contracts difficult to offer when risks are covariate – complex/transaction c.• Weather events (droughts/floods) tend to affect farmers more than other risks – and are covariate in nature.• Human health risks are normally individual in nature but transaction costs are normally too high for insurance providers in developing world. 5
  6. 6. Who can help poor farmers share risk?• Government-run social protection schemes that protect the poorest households against extreme risk through providing assets and transfers - but costly and difficult to deliver in a timely manner. Few and far between.• Commercial (formal) insurance and re-insurance markets – growing in importance but conventional products not suitable. Need for new product – eg. micro-insurance. Most insurance companies need support of large re-insurance co.• Financial institutions and farmers associations can make it easier for poor householders to save and borrow – but they require clients to have collateral and formal insurance cover.• Informal networks that can make it easier to save and borrow – but exposed to default risks and high interest.• Traditional societal systems from relatives/friends – most common and trusted but cannot cope with extreme events as everyone in network normally affected by extreme effects. Traditional systems tends to perpetuate poverty.• In Mongolia, good example of integrated protection system where catastrophic levels of livestock death due to the Dzud are covered by a public social protection scheme, large risks are covered by private insurance and the residue by farmers 6
  7. 7. Insurance as a business• Sustainable and affordable insurance schemes depend on satisfying the basic equation (A+I)/P <1, where A = administrative costs, I = indemnities paid, and P= premiums paid.• Historically most insurance schemes using conventional policies have incurred financial losses where A+I/P is >1. Scant information on viability of livestock insurance. 7
  8. 8. Financial performance of conventional crop insurance programmes in 6 countries****** Skees et al 1999 8
  9. 9. Livestock Losses• As a proverb in the Horn of Africa goes: if the animals die, then the people will die too. Ca.1 billion poor people in the developing world rely on livestock for their nutritional wellbeing, for social standing, for financial security, for draft power, for dung for fuel and fertilizer, and for skins for myriad purposes.• Despite many new developments in animal nutrition, breeding, husbandry practices, reproduction and animal health over the last 50 years, there are still annual losses of 50 million cattle and water buffalo, over 100 million sheep and goats and countless poultry from parasitic and infectious diseases alone. Many more succumb from inadequate feed and water supplies, climatic stresses, poor husbandry practices and poor policies. 9
  10. 10. Different livestock insurance schemesType of Livestock Insurance Description Pros and ConsProductIndividual coverage approach The herder is compensated for the number A good approach but susceptible to high of livestock lost. administrative costs, to moral hazard and adverse selectionA weather-based insurance Uses weather indicators as its basis. It Predictability of data for assessing risk andindex requires reliable historical weather data in computing premium affected by global climate order to develop the necessary weather change and renders the approach questionable index and good weather stations in the and expensive; additional data system support vicinity of the livestock population. might be requiredA Vegetation Index A proxy for a weather based index which Satellite imagery not developed sufficiently yet assesses vegetative cover (as a result of for every location/country – but this index likely weather conditions) through satellite to be preferred by insurance companies once mapping satellite coverage complete.A mortality-based insurance The insurance compensates individual The system is not prone to moral hazard, orindex herders whenever the livestock mortality adverse selection but it requires an inventory of rate in a local region exceeds a specific livestock species and census every year in all the threshold. The scheme postulates that local regions. The popularity of this method is herders retain small losses that do not increasing in Mongolia and has proved to be a affect the viability of their business, while good basis for insurance, even though it is not a the larger losses are transferred to the perfect solution. private insurance company and the government.Indigenous or traditional risk Relatives, friends, others provide support Despite its negative features, it is the systemavoidance and or coping and/or financial and material resources in most widely practiced. However, its use inmechanisms – informal event of catastrophic losses. conjunction with a formal insurance system isinsurance likely to be the most favored in future. 10
  11. 11. More on index-based insurance schemes• They allow farmers to protect themselves against catastrophic agricultural production risk by paying out when an independently observable trigger (such as a specific level of rainfall at a local weather station or satellite assessment of vegetative growth or livestock mortality within a defined geographical area) shows that an insurable event has occurred. This reduces the cost of providing insurance against a number of agricultural risks and allows insurance companies to reach poor households.• Index-based insurance schemes hold significant appeal for both commercial and development purposes because they allow for management of covariate risk – such as that associated with weather fluctuations, disease outbreaks, price shocks, etc. – and avoid the serious adverse selection and moral hazard problems that have long plagued conventional crop and livestock insurance programs throughout the world.• The creation of micro-insurance markets for risks whose likelihood of occurrence can be precisely calculated and associated to a well defined index is increasingly being championed as a way by which the benefits of insurance can be utilized by the poor. However, livestock insurance lagging far behind the crop insurance sector. 11
  12. 12. Specific Lessons on Index-based Livestock Insurance IBLI – pros, challenges and solutions (mostly from Barrett 2009)1. Pros to IBLIVery low transactions costs associated with measuring lossesPreserves effort incentives (no moral hazard) as no single individual can influenceindexAdverse selection does not matter as payouts do not depend on the riskiness ofthose who buy the insuranceAvailable on near real-time basis: faster response than conventional humanitarianreliefCan be used to create a productive safety net needed to alter poverty dynamicsEncourages financial institutions to provide loans ( Skees and Barnett, 2006) 12
  13. 13. 2. Challenges to sustainable IBLI Solutions to challengesHigh quality data (reliable, timely, non-manipulable, Satellite data (remotely sensedlong-term ) needed to calculate premium and to vegetation: NDVI)determine payoutsInnovation incentives for insurance companies to Researchers do product design work,design and market specific new products for discreet develop awareness materialsaudiences/locations.Establish informed effective demand, especially among Simulation games with reala clientele with little experience with insurance much information & incentives – see Carterless a complex index insurance product et al 2008Low cost mechanism for making insurance available for Delivery through partnersnumerous small and medium scale producersIndex insurance is new, and can be difficult for Resources must be invested instakeholders to understand explaining how it worksIndex insurance is vulnerable to basis risk viz. Obviously, if either of theseinsurance payouts do not match actual losses – either situations occurs too frequently thethere are losses but no payout, or a payout is triggered insurance scheme will not be viable,even though there are no losses and even damage livelihoods (Skees,2008). 13
  14. 14. Generic lessons learned from review.It is best to offer poor livestock keepers a package of rural financial services rather than solely livestock insuranceviz a blend of savings, lending, financing and risk minimizing opportunities ( see Pearce et al 2004; Hofmann andBrukoff, 2006; Vargas etal 2009)Government needs to be involved from the start of insurance schemes to address the public financial burden, atleast initiallyRisk must be sufficiently high to make banks and customers feel that insurance is useful, but not so high as to makethe premium unaffordable or scare off insurance companiesGet the big risk out of the way first. When agricultural insurance is placed into a broader framework motivated byhelping smallholder households smooth consumption over time, focusing on catastrophe insurance is likely to beconsidered more optimal.Involve users in insurance product development. Experience from pilot programmes stress the value of userinvolvement in developing and refining prototypesNeed reliable historical data and contemporary data on livestock losses at national and regional levels to providenecessary risk indicators and levels of confidence for engagement by private sector insurance community.Incentives should be provided for poor livestock keepers to access suitable schemes.Need modeling and modelers. Greater user involvement in product development would provide vital informationand feedback to modelers and product developers. Need to develop more modeling capacity in-country.Give explicit consideration to the characteristics of different risk layers; this is part of the development of broaderfinancial services for development between the poor and the insurance industryPromote partnership between users and providers of insurance services. Inclusive mix and shared responsibilitybetween livestock keepers, government and the private sector.Appreciate client concerns. Low-income clients often live in remote rural areas, requiring a different distributionchannel to urban insurance products 14
  15. 15. A basic guide to implementing livestock insuranceUnderstand the target audience, identify the specific risks for which insurance and/or financial servicesrequirements would result in reduced livestock mortality/losses and improved livelihoods.Identify the most important factor for the poor farmer to insure. Is it catastrophic events resulting inherd/flock mortality, individual animal losses or perhaps in some cases, loss of performance?Identify trusted historical and contemporary sources of information/data on livestock mortality,weather/climate data over the same time period, and other information on nationalinstability/insecurityAppreciate/understand the insurance and financial services in-country and the business opportunityafforded by high volume/low margin potential of insuring poor livestock keepers/pastoralists – andaccess to willing re-insurance institutions.Perform a pilot scheme (see ‘how to’ guide) and note the costs associated with implementing therequired monitoring of a potential scheme in distant rural communities.Identify possible complementary roles for the government and for the private sector.Decide on the most appropriate mix of traditional and commercial insurance and/or financial serviceproducts for different levels of insurance – and their cost.Market the schemes to livestock keepers with initial support/subsidy from government and increasedinvolvement of private sector actors. Identify trusted institutions who can market insurance/train poor.Initiate market potential studies in a limited number of countries. It is also recommended that theoutcome of the studies be implemented through timely, pilot, ‘learning by doing’, micro-insuranceinitiatives that are based on sound business models and practices premised on well - defined marketand comprehensive market analysis. 15

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