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Protecting Pastoralists from the Risk of  Drought Related Livestock Mortality: Implementing Index Based Livestock Insurance  in Northern Kenya  BRENDA WANDERA International Livestock Research Institute (ILRI) 12th Annual Inter Agency Donor Group meeting, 10 -13 May 2011, Nairobi, Kenya
Managing Risk in the ASALs Arid and Semi-Arid Lands (ASAL) residents, particularly in Northern Kenya, confront harsh and volatile environments. High level of risk: Droughts, Diseases, Conflict Low levels of capacity: Infrastructure deficient Few alternative livelihood  opportunities Livelihoods are primarily based  	on livestock = A high degree of vulnerability to risk (esp. in the presence of poverty traps)
Impact of Drought on Livelihoods   ,[object Object]
Drought is the single greatest cause of livestock mortality
Most drought related livestock mortality occurs under severe conditionsProportion of total income by source Livestock mortality by cause
Insurance and Agricultural Development Risk and shock of livestock mortality due to drought imposes considerable economic and welfare costs on pastoralists Sustainable insurance can mitigate this risk and shock But can insurance be sustainably offered in the ASALs? Conventional insurance cannot be sustainable, especially in remote pastoral area such as Marsabit and Northern Kenya Transactions costs Moral hazard/adverse selection
Index Based Insurance ,[object Object]
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),[object Object]
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

  • 1. Protecting Pastoralists from the Risk of Drought Related Livestock Mortality: Implementing Index Based Livestock Insurance in Northern Kenya BRENDA WANDERA International Livestock Research Institute (ILRI) 12th Annual Inter Agency Donor Group meeting, 10 -13 May 2011, Nairobi, Kenya
  • 2. Managing Risk in the ASALs Arid and Semi-Arid Lands (ASAL) residents, particularly in Northern Kenya, confront harsh and volatile environments. High level of risk: Droughts, Diseases, Conflict Low levels of capacity: Infrastructure deficient Few alternative livelihood opportunities Livelihoods are primarily based on livestock = A high degree of vulnerability to risk (esp. in the presence of poverty traps)
  • 3.
  • 4. Drought is the single greatest cause of livestock mortality
  • 5. Most drought related livestock mortality occurs under severe conditionsProportion of total income by source Livestock mortality by cause
  • 6. Insurance and Agricultural Development Risk and shock of livestock mortality due to drought imposes considerable economic and welfare costs on pastoralists Sustainable insurance can mitigate this risk and shock But can insurance be sustainably offered in the ASALs? Conventional insurance cannot be sustainable, especially in remote pastoral area such as Marsabit and Northern Kenya Transactions costs Moral hazard/adverse selection
  • 7.
  • 8. Policy holders paid based on external “index” that triggers indemnity payouts to all insured clients
  • 9. Suited for risks affecting a large number of people simultaneously and for which a suitable index exists.
  • 11. No transactions costs of measuring individual losses
  • 12. no moral hazard as no single individual can influence index.
  • 13. Adverse selection does not matter as payouts do not depend on the riskiness of those who buy the insurance
  • 15.
  • 16. Need for a measure that is:
  • 17. Highly correlated with livestock mortality
  • 18. Reliably and cheaply available for wide range of locations
  • 20.
  • 21. Performance of Predicted Livestock Mortality Index
  • 22.
  • 24.
  • 25. Risk coverage and pricing Need to select an index strike point to trigger indemnity? Trade off: Higher Strike  Lower Risk Coverage  Lower Cost Conditional or Unconditional? Payoff structure: Linear, Segmented, All or nothing, No claims bonus?
  • 26. Establishing informed effective demand Insurance is a difficult concept to sell Insurance is a foreign concept to relatively uninformed target Initial significant investment in extension and marketing Simulation games with real information and incentives
  • 27. From Theory to Practice Impact Assessment Does Index-Insurance deliver the social and economic benefits it promises? Need a rigorous research design to allow quantification and attribution of impacts? M&E to guide scale-up
  • 28.
  • 29. Differences in mandate and incentives
  • 35. Lack of experience with insurance and illiteracy
  • 36.
  • 37. The Marsabit Pilot Why Marsabit? Pastoral production is a key livelihood facing a risk profile suitable for targeting with an index insurance product Data availability affords precise contract design Rich understanding of pastoral economy, seasonal herd dynamics of populations in Marsabit Strong delivery partners and relationship with other key stakeholders on the ground
  • 38.
  • 39. 5.5% in Upper Marsabit
  • 40. 3.25% in Lower Marsabit
  • 41. 1 Tropical Livestock Unit (TLU) = 1 cattle = 0.7 camel = 10 goats/sheep values at Ksh 15,000
  • 42. To insure 1 TLU for a year costs
  • 43. 825 Ksh in Upper Marsabit
  • 44.
  • 45. On average, small herd size (TLU) insured
  • 46. Small size as business, need to grow
  • 47. Lack of understanding or misunderstanding of the product