Explaining index based livestock insurance to pastoralists

Livestock production in arid and semi-arid rangelands is a risky enterprise. Covariate risk of catastrophic livestock loss due to drought is the most critical uninsured risk facing livestock producers. These losses can lead to persistent poverty. We are trying to design an index based livestock insurance (IBLI) program as a viable means to help pastoralists in northern Kenya manage such covariate risk of livestock losses due to drought. A predicted livestock mortality index – established from a statistical relationship between satellite-generated vegetation imagery and historical records of community level livestock losses – represents an objectively, cost effectively measured and non-human manipulable index that triggers insurance payout. The insurance is offered by private insurance companies. The advantages of reduced transaction costs and asymmetric information problems, however, come at the cost of increased basis risk, which refers to the imperfect correlation between an insured‟s loss experience and the index. We have developed a game that explains to pastoralists how such an insurance product could work. We built in the game both covariate and idiosyncratic shocks, and use a subsistence constraint to generate bifurcating asset dynamics, observed empirically in the targeted communities. This paper describes how the game was designed, how it was used in the field, and presents findings on how individuals played the game. The paper concludes by discussing how these findings are being used in the design and broader extension of the index based insurance product

Developing Index Based Livestock Insurance for managing livestock asset risks in Northern Kenya

This study develops an index-based livestock insurance (IBLI) product for managing key livestock asset risks of pastoralists in the arid and semi-arid lands of northern Kenya, where insurance markets are effectively absent and uninsured risk exposure is a main cause of persistent poverty. It uses a combination of field experiments and surveys conducted in summer 2008, and pre-existing household-level panel data sets in: (1) designing a market-viable contract; (2) conducting ex-ante householdlevel welfare analysis; and (3) eliciting willingness to pay (WTP) for the product among the targeted population. IBLI offers compensation based on a predicted location aggregate livestock mortality index constructed from a strong statistical relationship between household herd mortality rates and high quality, objectively verifiable, remotely-sensed measures of vegetative cover on rangelands that are not manipulable by insured parties. It thus has potential to resolve the transaction costs and asymmetric information problems that cripple traditional insurance. The presence of a threshold-based poverty trap in East African pastoralism leads to nonlinear IBLI valuation, as found both in the simulation-based welfare analysis and in WTP estimates elicited through field surveys and experiments. This implies that IBLI could be both a commercially viable insurance product for better-off pastoralists, as well as a pro-poor instrument to use as a safety net for pastoralists vulnerable to losing their herds and collapsing into chronic poverty. The IBLI contract originally designed in this study has been slightly modified and launched in a pilot in January 2010 in the Marsabit district of northern Kenya by a Kenyan commercial insurer with retail distribution/brokerage by a leading private financial institution, international reinsurance by Swiss Reinsurance, with the International Livestock Research Institute (ILRI) leading the effort and the associated monitoring and evaluation program

Willingness to pay for index based livestock insurance: results from a field experiment in northern Kenya

Submitted to American Journal of Agricultural Economics, October 200

The performance of index based livestock insurance: ex ante assessment in the presence of a poverty trap

This paper evaluates the effectiveness of a new index-based livestock insurance (IBLI) product designed to compensate for area average predicted livestock mortality loss in northern Kenya, where previous work has established the presence of poverty traps. We simulate household-specific wealth dynamics based on a model parameterized using rich panel and experimental data from the region. The simulations allow us to investigate patterns of willingness to pay for asset index insurance that is imperfectly correlated with individuals' loss experience. The bifurcated livestock dynamics associated with the poverty trap gives rise to insurance valuation that is highly nonlinear in individual herd size. Willingness to pay among vulnerable groups who most need insurance are, on average, lower than commercially viable rates but subsidization of IBLI premiums appears to offer more cost-effective poverty reduction than direct transfers to the poor

Designing index based livestock insurance for managing asset risk in northern Kenya

This paper describes a novel effort at developing index-based insurance for locationaveraged livestock mortality as a means to fill an important void in the risk management instruments available to protect the main asset of pastoralists in the arid and semi-arid lands of Kenya, where insurance markets are effectively absent and uninsured risk exposure is a main cause of the existence of poverty traps. We describe the detailed methodology in designing such insurance contract with the underlying index uniquely constructed off explicit statistical predictions established using longitudinal observations of household-level herd mortality, fit to high quality, objectively verifiable remotely sensed vegetation data not manipulable by either party to the contract and available at low cost and in near-real time. The resulting index performs very well out of sample, both when tested against other complementing household-level herd mortality data from the same region and period and when compared qualitatively with community level drought experiences over the past 27 years. We describe contract pricing and potential risk exposures of the underwriter using a rich time series of satellite-based vegetation data available from 1982-present. And finally, implementation opportunities and challenges are discussed to spur the product’s pilot potential

Altering poverty dynamics with index insurance: northern Kenya’s HSNP+

Abstract not available

Insuring against drought‐related livestock mortality: Piloting index based livestock insurance in northern Kenya

Climate related shocks are among the leading cause of production and efficiency losses in smallholder crop and livestock production in rural Africa. Consequently, the identification of tools to help manage the risks associated with climactic extremities is increasingly considered to be amongst the key pillars of any agenda to enhance agricultural growth and welfare in rural Africa. This paper describes the application of a promising innovation in insurance design – index‐based insurance – that seeks to bring the benefits of formal insurance to help manage the weather‐related risks faced by rural crop and livestock producers in low‐income countries. In particular, we highlight the research and development agenda of a comprehensive effort to design commercially viable index‐based livestock insurance aimed at protecting the pastoral populations of Northern Kenya from the considerable drought‐related livestock mortality risk that they face. Detailing the conditions that make the pastoral economy in Northern Kenya an ideal candidate for the provision of index‐based insurance products, the paper describes the contract design, defines its structure, offers analysis that indicates a high likelihood of commercial sustainability among the target market and describes the process of implementation leading up to the launch of a pilot in Marsabit district of Northern Kenya in early 2010

Insuring against drought-related livestock mortality: Piloting index-based livestock insurance in northern Kenya

Climate related shocks are among the leading cause of production and efficiency losses in smallholder crop and livestock production in rural Africa. Consequently, the identification of tools to help manage the risks associated with climactic extremities is increasingly considered to be among the key pillars of any agenda to enhance agricultural growth and welfare in rural Africa. This paper describes the application of a promising innovation in insurance design – index-based insurance – that seeks to bring the benefits of formal insurance to help manage the weather-related risks faced by rural crop and livestock producers in low-income countries. In particular, we highlight the research and development agenda of a comprehensive effort to design commercially viable index based livestock insurance aimed at protecting the pastoral populations of northern Kenya from the considerable drought-related livestock mortality risk that they face. Detailing the conditions that make the pastoral economy in northern Kenya an ideal candidate for the provision of indexbased insurance products, the paper describes the contract design, defines its structure, offers analysis that indicates a high likelihood of commercial sustainability among the target market and describes the process of implementation leading up to the launch of a pilot in Marsabit District of northern Kenya in early 2010