Protecting Pastoralists from the Risk of Drought Related Livestock Mortality: Index Based Livestock Insurance in Northern Kenya and Sothern Ethiopia BRENDA WANDERA TFESSD Forum Dar es Salaam Tanzania, November 17, 2011
Background Project overview 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 Climate change has interfered with ability to predict seasons Livelihoods are primarily based on livestock = A high degree of vulnerability to risk (esp. in the presence of poverty traps)
Project overview 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
Project overview 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)
Project overview Potential benefits/impacts of IBLI Stabilize asset accumulation and enhance economic growth Stem the downward spiral of vulnerable households into poverty Crowd in finance for ancillary investment and growth Reinforce extant social insurance mechanisms (group based insurance) Enhance local adaptation to climate change
Project overview Project plan IBLI Northern Kenya Marsabit pilot Northern Kenya Expansion IBLI Southern Ethiopia Borana pilot Initial research for both Borana and Marsabit funded by TFESSD
1. The risk and the index The Marsabit The pilot: index contract features Risk- Drought related Livestock Mortality Index Predicted livestock mortality Need to model a relationship between the risk to be insured and the indicator (NDVI) 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 DATA Livestock Mortality NDVI Response Function Index Predicted Livestock Mortality
The Marsabit Geographic pilot: contract Clusters features 2. Geographical clustering 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) ILLERET SABARET DUKANA EL-HADI DARADE NORTH HORR BALESA FUROLE HURRI HILLS MOITE GALAS EL GADE GAS KALACHA MAIKONA LOIYANGALANI ARAPAL LARACHI KURUGUM TURBI Maikona North Horr Central and Gadamoji Laisamis Loiyangalani OLTUROT MT. KULAL BUBISA MAJENGO(MARSABIT) KARGI JIRIME QILTA HULAHULA SAGANTE KURUNGU OGUCHO DIRIB GOMBO KITURUNI SONGA KARARE JALDESA HAFARE SHURA SOUTH HORR(MARSA) KAMBOYE KORR ILLAUT(MARSABIT) LOGOLOGOGUDAS/SORIADI LONYORIPICHAU NGURUNIT LAISAMIS LONTOLIO KOYA IRIR MERILLE
3. Contract trigger level The Marsabit pilot: contract features The IBLI contract has an index strike point that triggers indemnity Contract strike level for Marsabit is 15% Trade off: Higher Strike Lower Risk Coverage Lower Cost
4. Contract premiums The Marsabit pilot: contract features Consumer premiums for 15% Strike Contracts in Marsabit, providing annual coverage with two potential payout periods are; Contract Cluster Consumer Price Upper Marsabit 5.5% Lower Marsabit 3.25% Consumer premium rates not total market premium rates which are 9.2% in upper and 5.4% in lower. 40% premium subsidy provided by Global Index Insurance Facility - GIIF
The Marsabit pilot: contract features 5. Insurable units and valuation To arrive at a value for the insured herd, the livestock types have been transformed into a standard livestock unit - Tropical Livestock Unit (TLU). 1 TLU = 1 cattle = 0.7 camel = 10 goats/sheep Using average prices for livestock across Marsabit we have arrived at a set price per TLU insured of Kshs. 15,000 To insure 1 TLU for a year costs; Kshs 825 in Upper Marsabit Kshs 487.5 in Lower Marsabit
The Marsabit pilot: contract features 6. Temporal structure of the IBLI contract 1 year contract coverage LRLD season coverage SRSD season coverage 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 Prior observation of NDVI since last rain for LRLD season Sale period For LRLD Period of continuing observation of NDVI for constructing LRLD mortality index Sale period Predicted LRLD mortality is announced. For SRSD Indemnity payment is made if triggered Prior observation of NDVI since last rain for SRSD season Sale period For SRSD Period of NDVI observations for constructing SRSD mortality index Predicted SRSD mortality is announced. Indemnity payment is made if triggered
The Marsabit pilot: Implementation IBLI contracts sold for three periods. Contract sales: Jan/ Feb 2010 1,979 contracts sold. Sales done mainly manually but also through POS device Jan/ Feb 2011 647 contracts sold. Sales done through mobile platform and POS devices Aug/ Sep 2011 516 contracts sold Impact assessment studies to check if Index Insurance delivers the social and economic benefits it promises Baseline survey October 2009 First repeat October 2010 Second repeat October 2011 Improved product implementation Improved extension tools and channels Better delivery platforms Trust I st payout October 2012
The Marsabit pilot: Implementation Payouts Payments made to insured pastoralists in all the five divisions in Marsabit. Predicted mortality in all five divisions above 15% Event to launch payout in Marsabit - 21st October Widespread agreement with the livestock mortality rates predicted by the model. IBLI Marsabit Index in Oct 2011 (LRLD 2011 insurance period) North Horr: 28% Loiyangalani: 18 % Maikona: 33% Central and Gadamoji: 26% Laisamis:22 %
Activities The Borana pilot Design a Livelihood Focused and Demand-Driven Product- Testing a different model Offers indemnity payments based directly on triggered cumulative deviation of NDVI from the long term average Possibility of rewards for climate change adaptation activities Investigate Alternative Contract Structures Develop Financial Educational Tools for Informed and Sustainable Demand Impact Evaluation Baseline survey Follow up surveys Structures
Challenges and needs Public private partnerships Differences in mandate and incentives Competition? Funding Poor infrastructure Product delivery Low cost delivery Information dissemination- Information delivery platform Client education Lack of experience with insurance and illiteracy - Effective extension methods and tools - Continuous education Costs Partnerships with local institutions involved in extension?
Key messages and lessons learnt Training and extension Easier in local language Be continuous Radio and video extension useful Information dissemination Need for a person or office in the area for constant information Use of cheaper and easier to use technology for product delivery Scanner cell phones - Need for continuous education on use and the product features - Training be carried out early to prepare for sale periods Public private partnerships Need for competition
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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
Project objectives and target 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 Proportion of total income by source 4% 2% 6% Milk 14% Livestock Sale 44% Slaughter Food aid Salary/ wage Cultivation Trade 15% Gift Livestock mortality by cause 4% 10% 800 700 600 500 400 300 200 100 Other Bad Water Rain Old Age Killed to protect mother Accident / injury Predator Disease Pasture / drought / starvation 0 June 2000 Sept. 2000 Dec. 2000 March 2001 June 2001 Sept. 2001 Dec. 2001 March 2002 June 2002
Data NDVI February 2009, Dekad 3 Deviation of NDVI from long-term average February 2009, Dekad 3 NASA NDVI Image Produced By: USGS-EROS Data Center. Source: Famine Early Warning System Network (FEWS-NET) 5 4 3 2 1 0-1 -2-3 1981 1982 1983 1984 1985 1986 1987 1987 1988 1989 1990 Laisamis Cluster, Laisamis zndvi Cluster (1982-2008) 1991 1992 1993 1994 1995 1996 1997 1998 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Karare Logologo Ngurunit Korr Historical droughts
Performance of Predicted Livestock Mortality Index