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 ]

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.
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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.
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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 .
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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.
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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.
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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
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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.
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8. Financial performance of conventional crop
insurance programmes in 6 countries***
*** Skees et al 1999
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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. Different livestock insurance schemes
Type of Livestock Insurance Description Pros and Cons
Product
Individual 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 selection
A weather-based insurance Uses weather indicators as its basis. It Predictability of data for assessing risk and
index 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 required
A 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, or
index 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 system
avoidance and or coping and/or financial and material resources in most widely practiced. However, its use in
mechanisms – informal event of catastrophic losses. conjunction with a formal insurance system is
insurance likely to be the most favored in future.
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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.
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12. Specific Lessons on Index-based Livestock Insurance
IBLI – pros, challenges and solutions (mostly from Barrett 2009)
1. Pros to IBLI
Very low transactions costs associated with measuring losses
Preserves effort incentives (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
Available on near real-time basis: faster response than conventional humanitarian
relief
Can be used to create a productive safety net needed to alter poverty dynamics
Encourages financial institutions to provide loans ( Skees and Barnett, 2006)
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13. 2. Challenges to sustainable IBLI Solutions to challenges
High quality data (reliable, timely, non-manipulable, Satellite data (remotely sensed
long-term ) needed to calculate premium and to vegetation: NDVI)
determine payouts
Innovation incentives for insurance companies to Researchers do product design work,
design and market specific new products for discreet develop awareness materials
audiences/locations.
Establish informed effective demand, especially among Simulation games with real
a clientele with little experience with insurance much information & incentives – see Carter
less a complex index insurance product et al 2008
Low cost mechanism for making insurance available for Delivery through partners
numerous small and medium scale producers
Index insurance is new, and can be difficult for Resources must be invested in
stakeholders to understand explaining how it works
Index insurance is vulnerable to basis risk viz. Obviously, if either of these
insurance payouts do not match actual losses – either situations occurs too frequently the
there 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).
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14. Generic lessons learned from review.
It is best to offer poor livestock keepers a package of rural financial services rather than solely livestock insurance
viz a blend of savings, lending, financing and risk minimizing opportunities ( see Pearce et al 2004; Hofmann and
Brukoff, 2006; Vargas etal 2009)
Government needs to be involved from the start of insurance schemes to address the public financial burden, at
least initially
Risk must be sufficiently high to make banks and customers feel that insurance is useful, but not so high as to make
the premium unaffordable or scare off insurance companies
Get the big risk out of the way first. When agricultural insurance is placed into a broader framework motivated by
helping smallholder households smooth consumption over time, focusing on catastrophe insurance is likely to be
considered more optimal.
Involve users in insurance product development. Experience from pilot programmes stress the value of user
involvement in developing and refining prototypes
Need reliable historical data and contemporary data on livestock losses at national and regional levels to provide
necessary 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 information
and 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 broader
financial services for development between the poor and the insurance industry
Promote partnership between users and providers of insurance services. Inclusive mix and shared responsibility
between livestock keepers, government and the private sector.
Appreciate client concerns. Low-income clients often live in remote rural areas, requiring a different distribution
channel to urban insurance products
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15. A basic guide to implementing livestock insurance
Understand the target audience, identify the specific risks for which insurance and/or financial services
requirements 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 in
herd/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 national
instability/insecurity
Appreciate/understand the insurance and financial services in-country and the business opportunity
afforded by high volume/low margin potential of insuring poor livestock keepers/pastoralists – and
access to willing re-insurance institutions.
Perform a pilot scheme (see ‘how to’ guide) and note the costs associated with implementing the
required 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 service
products for different levels of insurance – and their cost.
Market the schemes to livestock keepers with initial support/subsidy from government and increased
involvement 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 the
outcome of the studies be implemented through timely, pilot, ‘learning by doing’, micro-insurance
initiatives that are based on sound business models and practices premised on well - defined market
and comprehensive market analysis. 15