Protecting Pastoralists from the Risk of Drought Related Livestock Mortality:

Implementing Index Based Livestock Insurance in Northern Kenya

BRENDA WANDERAInternational 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

• Livestock is both the principal asset and source of income for the vast majority of ASAL residents

• Drought is the single greatest cause of livestock mortality

• Most drought related livestock mortality occurs under severe conditions

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June 2000 Sept. 2000 Dec. 2000 March2001

June 2001 Sept. 2001 Dec. 2001 March2002

June 2002

Other

Bad Water

Rain

Old Age

Killed to protect mother

Accident / injury

Predator

Disease

Pasture / drought / starvation

44%

10%4%

15%

14%

6%

4% 2%

Milk

Livestock Sale

Slaughter

Food aid

Salary/ wage

Cultivation

Trade

Gift

44%

10%4%

15%

14%

6%

4% 2%

Milk

Livestock Sale

Slaughter

Food aid

Salary/ wage

Cultivation

Trade

Gift

Proportion 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

• New innovation in insurance avoids problems that make traditional insurance unprofitable for small and remote clients:

• 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)

In designing an index• Need to model a relationship between the risk to be insured and the

index The Response Function

• Need for a measure that is:• Highly correlated with livestock mortality

• Reliably and cheaply available for wide range of locations

• Historically available

• The challenge of data availability

The index

DATA• Livestock Mortality• NDVI

Response Function

Index• Predicted Livestock

Mortality

NASA NDVI Image Produced By: USGS-EROS Data Center. Source: Famine Early Warning System Network (FEWS-NET)

NDVI February 2009, Dekad 3 Deviation of NDVI from long-term average February 2009, Dekad 3

Laisamis Cluster

-3-2-1012345

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08

Karare

Logologo

Ngurunit

Korr

Laisamis Cluster, zndvi (1982-2008)

Historical droughts

Data

Performance of Predicted Livestock Mortality Index

Geographic Clusters

KARGI

SHURA

MAIKONA

BUBISA

TURBI

ILLERET

GALAS

SABARET

KOYA

DARADE

NORTH HORR

DUKANA

EL GADE

KORR

KURUGUM

BALESA

LAISAMIS

EL-HADI

FUROLE

KALACHA

HAFARE

GAS

HURRI HILLS

LOIYANGALANI

KURUNGU

LONTOLIO

ARAPAL

LOGOLOGO

QILTA

MT. KULAL

MOITE

GUDAS/SORIADI

KARARE

IRIR

NGURUNIT

LARACHI

KAMBOYESOUTH HORR(MARSA)

LONYORIPICHAU

SONGA

MERILLE

ILLAUT(MARSABIT)

HULAHULA

MAJENGO(MARSABIT)

OGUCHO

OLTUROT

JALDESA

KITURUNIDIRIB GOMBO

JIRIME

SAGANTE

Upper Marsabit Contract

Legend

IndexDivision

Index Division

Central and Gadamoji

Laisamis

Loiyangalani

Maikona

North Horr

Lower Marsabit Contract

Legend

IndexDivision

Index Division

Central and Gadamoji

Laisamis

Loiyangalani

Maikona

North Horr

• Estimate separate response functions for distinct geographic clusters due to differences in herd composition, grazing ranges, water access, etc.

• Upper Marsabit (Chalbi)

• Lower Marsabit (Laisamis)

Temporal coverage of IBLI contract

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Period of continuing observation of NDVIfor constructing LRLD mortality index

LRLD season coverage SRSD season coverage

1 year contract coverage

Sale periodFor SRSD

Predicted SRSD mortality is announced.Indemnity payment is made if triggered

Period of NDVI observationsfor constructing SRSDmortality index

Prior observation of NDVI sincelast rain for LRLD season

Sale periodFor LRLD

Sale periodFor SRSD

Predicted LRLD mortality is announced.Indemnity payment is made if triggered

Prior observation of NDVI since last rainfor SRSD season

Short Rain Short Dry Long Rain Long Dry Short Rain Short Dry

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

Period of continuing observation of NDVIfor constructing LRLD mortality index

LRLD season coverage SRSD season coverage

1 year contract coverage

Sale periodFor SRSD

Predicted SRSD mortality is announced.Indemnity payment is made if triggered

Period of NDVI observationsfor constructing SRSDmortality index

Prior observation of NDVI sincelast rain for LRLD season

Sale periodFor LRLD

Sale periodFor SRSD

Predicted LRLD mortality is announced.Indemnity payment is made if triggered

Prior observation of NDVI since last rainfor SRSD season

Short Rain Short Dry Long Rain Long Dry Short Rain Short Dry

• 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?

Contract Cluster Consumer Price

Upper Marsabit 5.5%

Lower Marsabit 3.25%

Risk coverage and pricing

• 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

Establishing informed effective demand

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

From Theory to Practice

Challenges

• Public private partnerships

• Differences in mandate and incentives

• Funding

• Poor infrastructure

• Product delivery

• Information dissemination

• Client education

• Lack of experience with insurance and illiteracy

• Costs

Thank you.

For more information, please visitwww.ilri.org/ibli

• 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

The Marsabit Pilot

Contract Premiums

• Premiums for contract with trigger level 15%, providing annual coverage with two potential payout periods

• 5.5% in Upper Marsabit• 3.25% in Lower Marsabit

• 1 Tropical Livestock Unit (TLU) = 1 cattle = 0.7 camel = 10 goats/sheep values at Ksh 15,000

• To insure 1 TLU for a year costs• 825 Ksh in Upper Marsabit• 487.5 Ksh in Lower Marsabit

Contract Sales Jan/Feb 2010

PREMIUM RATE

CONTRACTS SOLD

CATTLE NO. INSURED

SHEEP/ GOATS NO. INSURED

CAMELS NO. INSURED

TOTAL TLU INSURED

AVERAGE TLU INSURED

TOTAL VALUE OF INSURED LIVESTOCK

TOTAL VALUE OF COLLECTED PREMIUMS

(KSh) (KSh)

UPPER 5.50% 556 371 11,081 185 1,738 3.1 26,071,500 1,433,933

LOWER 3.25% 1,423 3,537 4,745 154 4,227 3.0 63,406,500 2,060,711

TOTAL 1,979 3,908 15,826 339 5,965 3.0 89,478,000 3,494,644

• High uptake• On average, small herd size (TLU) insured• Small size as business, need to grow• Lack of understanding or misunderstanding of the product