financial instruments for managing risk and food insecurity in the arid pastoral regions of kenya

Financial Instruments for Managing Climate Risk and Food Insecurity

in the Arid Pastoral Regions of Kenya

Michael R Carter

NBER & University of California, DavisBASIS I4 Index Insurance Innovation Initiative

http://basis.ucdavis.edu

Authors’ Workshop on Climate Smart Agriculture: Building Resilience to ClimateChange

Palazzo Clerici, Milan

August 5, 2015

M.R. Carter Financial Instruments

Outline

The Challenge of Food Insecurity and Poverty Dynamics in theArid Regions of KenyaThe IBLI concept: Using satellite measures of forageavailability to predict livestock lossesManaging Food Insecurity and Poverty Dynamics in the Faceof Climate ChangeRemaining Challenges to the Design & Pricing of FinancialInstruments to Manage Risk


The Challenge of Food Insecurity and Poverty Dynamics inthe Arid Regions of Kenya

Arid lands of northern Kenya home to 3-4 million people,largely dependent on livestock and subject to drought shocksA reality in which almost 1.5 million people required’emergency’ food aid every year prompted the 2008 creation ofthe HSNP to pay regular cash transfers to the indigentAnd yet, similar to emergency food aid, HSNP does little toaddress the risk-driven food insecurity dynamics thatvulnerability that underlay this high level of indigenceIBLI (index-based livestock insurance) was designed as aninstrument that could cost effectively address this problem ofvulnerabilityPotentially cost-effective as the cost of a 50% insurancesubsidy that might protect a family from falling into indigencewas almost an order of magnitude less than the cost oftransfers should that same family collapse into indigence


IBLI Contract Design


Ground-truthing of IBLI Design

Ground-truthing based on average mortality loss in communityMore recent work by Jensen et al. suggests idiosyncratic riskimportant


Does IBLI Work?

IBLI Insurance had payout in October 2011 after a prolongeddrought that sparked 30-40% livestock mortalityOctober 2011 survey asked insured and uninsured householdshow they had been coping with the drought prior to thepayout/survey & how they anticipated coping after thepayout/survey


Does IBLI Work?

Initially better off households:Before Payout: No impact on consumption reduction nor onasset sales prior to payoutAfter Payout: 65 %-point reduction in asset sales after payout

Initially worse off households:Before Payout: 30 %-point reduction in “meals reduced” priorto payout; No impact on asset salesAfter Payout: 43 %-point reduction in “meals reduced” afterpayout; No impact on asset sales

Recent paper by Jensen et al. finds that IBLI is more cost-effectivethan cash transfers as a way to “purchase” nutritional gains


Managing Food Insecurity and Poverty Dynamics in theFace of Climate Change

So given evidence that IBLI can work (if imperfectly), what isthe best way to utilize it into an integrated system of foodsecurityClimate change, understood as an increase in the frequencyand severity of shocks, raises the stakes on this questionLet’s consider some theoretical insights and an upcomingKenyan program, which will hopefully be carefully evaluated


IBLI for Smarter Food Security Policy: Theory

Constant budget policy experimentsCash transfers for indigent50% insurance subsidy for poor and vulnerable, with residualbudget spent on cash transfers

Climate change scenarios reveal that inverted-u shaped returnsto vulnerability targeting


IBLI for Smarter Food Security Policy: Theory

In the policy simulation, insurance subsidy works well becauseit harnesses two forces:

Restores assets so families do not collapseEnhances investment incentives so families can prudentiallyinvest & reduce vulnerability

Together these forces bring the dramatic drops in chronicpoverty & increases in self-relianceKey features of this approach

Public purchase (or partial purchase) helps make the market(& instills confidence)Unlike ad hoc schemes in some South American countries,individuals can buy insurance beyond the publicly-fundedmargin, enhancing investment incentives & growth


IBLI for Smarter Food Security Policy: Practice

Kenya is introducing 2 new programs with IBLI elements:

HSNP-II cash transfer program that scales ’vertically’ andhorizontally based on NDVI-based forage indexKLIP (Kenya Livestock Insurance Program) as a vulnerabilitytargeted IBLI subsidy that provides 5 free units of IBLI fornon-HSNP eligible households

Will these programs work?

Conceptual questions about targetingEmpirical Questions


Remaining Challenges

While we are beginning to see that index insurance can realizeits promise to fundamentally alter income growth & povertydynamics, it is no magic bulletSubstantial challenges remain to be resolved if index insuranceis to fully reach its promise

DesignPricing

The HSNP-II/KLIP programs are promising, not only becausethey are well-designed, but also because they will likely help usanswer many of the key challenges about index insurance thatwe have discussed today


financial instruments for managing risk and food insecurity in the arid pastoral regions of kenya

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