Sustainable livestock insurance for pastoralists Evidence and Insights from the Index-Based Livestock Insurance (IBLI) programs in Kenya and Ethiopia Andrew Mude December 2014

Motivation: Poverty Traps And Catastrophic Risk There is strong evidence of poverty traps in the arid and semi-arid lands (ASAL) of northern Kenya and southern Ethiopia. These put a premium on risk mgmt. Catastrophic herd loss risk due to major droughts identified as the major cause of these dynamics. Source: Lybbert et al. (2004 EJ) on Boran pastoralists in s.Ethiopia. See also Barrett et al. (2006 JDS) among n. Kenyan pastoralists, Santos & Barrett (2011 JDE) on s.Ethiopian Boran.

Motivation: Standard Responses to Drought Standard responses to major drought shocks: Post-drought restocking 2) Food aid/Cash Aid Key Problems: Slow Expensive (in part, because it’s slow) Targeting challenges Food aid can reinforce sedentarization/foster dependency Core issue: If transfers go only to the poor who are already in the poverty trap, the numbers of poor will grow as shocks knock others below the poverty trap threshold. In the long-run, the ex ante poor worse off as others join their ranks and compete for scarce social assistance resources. (see Barrett, Carter & Ikegami 2012 for more general theory/illustrations)

Livestock Insurance as an Alternative Commercially sustainable insurance can: Prevent downward slide of vulnerable populations Crowd-in investment and accumulation by the poor Induce financial deepening by crowding-in credit Let us focus humanitarian resources on the needy But can insurance be sustainably offered in the ASAL? Conventional (individual) insurance unlikely to work, especially in small scale pastoral/agro-pastoral sector: Very high transactions costs, esp. w/little financial intermediation among pastoralists Moral hazard/adverse selection

Index Based Livestock Insurance (IBLI) Index insurance is a variation on traditional insurance: Do not insure individual losses. Instead insure some “index” measure that is strongly correlated with individual losses. (Examples: rainfall, remotely sensed vegetation index, area average yield, area average herd mortality loss). Index needs to be: objectively verifiable available at low cost in real time not manipulable by either party to the contract

The Major Challenges of Index Insurance High quality data (reliable, timely, non-manipulable, long- term) to design/price product and to determine payouts Minimize uncovered basis risk through product design. Is it insurance or a lottery ticket? All turns on basis risk!!! Innovation incentives for insurers/reinsurers to design and market a new product and global market to support it Establish informed effective demand, especially among a clientele with little experience with any insurance, much less a complex index-based insurance product Low cost delivery mechanism for making insurance available for numerous small and medium scale producers

The IBLI Research and Development Agenda 1) Support development of IBLI institutions and services to improve market effectiveness and catalyze informed demand 2) Design of IBLI contracts 3) Assessing behavioral change and welfare impacts due to IBLI 4) Researching drivers of change in pastoralist systems (IBLI Plus) 7

ILRI’s Program in Summary Initial IBLI work (contract design, innovations platform, willingness to pay etc) in 2008 From HSNP Plus (Productive Safety Net) to Commercial Orientation First launched in Marsabit in January 2010 with Equity Insurance Agency and UAP Insurance First payout in Marsabit in October 2011. Missed opportunity due to various implementation challenges Launched in Borana Zone of S. Ethiopia in July 2012 by OIC insurance. IBLI Phase II commenced in late 2012 with reorientation toward PPP Revised contract in August 2013 and developed product for 11 N. Kenya Divisions. Contract provision extended to Isiolo and Wajir in August 2013. APA underwriting in Isiolo and Marsabit with support from World Vision and CARE. Takaful Insurance of Africa underwriting in Wajir with support from Mercy Corps. Payout in March 2014 in Wajir and some places in Isiolo and Wajir Working closely with State Department of Livestock and World Bank in support of GOK IBLI intentions 8

IBLI Pilots, and research design, in Ethiopia and Kenya IBLI survey launched in Marsabit, Kenya in Oct 2009 and in Borana, Ethiopia, Mar 2012 both before the respective launch of IBLI sales Marsabit survey: 925 households over 16 locations – currently 5 rounds of panel data Borana survey: 515 households over 17 kebeles – currently 3 rounds of panel data

First contract in initial pilot site, Marsabit: Based on satellite data on forage availability- Normalized Differenced Vegetation Index (NDVI): Pays out when forage scarcity is predicted to cause livestock deaths in an area. Contract is for Asset Replacement IBLI Contract Design Normalized difference vegetation index (NDVI) 1-10 May 2011 bad vegetation 1-10 May 2010 good vegetation 10

IBLI Contract Design Index Response Function: Regress historic livestock mortality data onto transformations of historic cumulative standardized NDVI. In Borana, contract more precisely defined as a forage scarcity contract: only based on transformations of NDVI Ethiopia contract much simpler to develop, explain and scale up: however, cannot define “basis risk” of a forage scarcity contract IBLI Contract Design DATA Response Function Index 11

IBLI Marsabit Contract: An Imperfect Product Covariate risk is important but household losses vary a lot … and the index does not perfectly track covariate losses. Only such study of index-insurance products that we know off. Crucial for assessing value and precision of the contract. Jensen, Barrett & Mude 2014

IBLI Contract Design Evolution (Northern Kenya) For scale out, needed to design IBLI contracts for 11 additional northern Kenyan districts. However, available mortality data less complete than for Marsabit. Employed spatial methods to fill in missing mortality observations and estimated spatially- explicit division-specific index response functions (Woodard et al., JRI, 2014) Improved remote sensing data and processing algorithms (Vrieling et al., IJAEOG 2014) Model has performed dismally in contract sites (Marsabit, Isiolo, Wajir) Agreement to move away from predicted mortality contracts to forage scarcity contracts similar to Borana, S. Ethiopia. Also working with the GoK/WB to design NDVI-based asset protection contracts. Our insurance partners also interested.

IBLI Uptake Significant … But So Is Disadoption Marsbit survey respondents uptake patterns (n=832) Sales window New1 Replace-ment2 Augment-ing3 Hold-ing4 Reenter5 Lapsed6 Total7 J-F 2010 233 J-F 2011 65 62 171 298 A-S 2011 31 96 22 149 363 A-S 2012 19 25 33 305 382 1First time purchasers. 2Replaced a policy about to expire. 3Purchased additional coverage that overlapped with existing coverage. 4No purchase but had existing coverage. 5Let policy lapse for at least one season but purchased this season. 6Past policies have lapsed and did not purchased additional coverage.7Total number of households that have purchased to date.

IBLI Uptake Significant … Capacity to predict uptake patterns is reasonably strong: Unconditional observed / predicted (Cond. FE) likelihood of buying IBLI Observed / predicted (Cond. FE) level of purchases (|buying IBLI)

Key determinants of IBLI uptake General uptake findings — robust across specifications and surveys Price: Responsive to premium rate (price inelastic). Price elasticity grows w/design risk. Design Risk: Design error reduces uptake; greater effect at higher premium rates. Idiosyncratic Risk: Hh understanding of IBLI increases effect of idiosyncratic risk Understanding: Extension/marketing improves accuracy of IBLI knowledge but no independent effect of improved understanding on uptake. Herd size: Likelihood of uptake increasing in HH herd size Liquidity: IBLI purchase increasing w/HSNP participation and HH savings Intertemporal Adverse Selection: HHs buy less when expecting good conditions. Spatial Adverse Selection: HHs in divisions with covariate risk are more likely to purchase and with greater coverage (spatial adverse selection). Gender: no gender diff in uptake. Women more sensitive to risk of new product. Bageant 2014; Jensen, Mude & Barrett 2014; Takahashi et al. 2014

Implementing IBLI: Into the real world CAPACITY DEVELOPMENT, EXTENSION, MARKETING, SALES Implementation of IBLI is a joint effort between ILRI (with support of its technical and development partners), commercial underwriters and implementing partners on the ground (government, NGOs, CBOs etc). 17

Implementing IBLI: Challenges and Debates Initial push for commercial sustainability was met with the challenge of low sales. Variety of reasons for low sales: Implementation is complex and more still with microinsurance in the challenging terrain of N. Kenya and Southern Ethiopia. Can we get to a critical mass of IBLI adoption necessary for sustaining the industry without consistent public support at the early stages? 18

The Challenge of Sustainability Productive Social Safety Net Commercial Viability International experience shows that agricultural insurance programs that have scaled up have strong public and private sector pillars, as part of overall agriculture risk management strategy Research showing positive social and economic impacts provide some justification for public support. 19

IBLI Impacts: Herd mortality risk Proportion of households for whom IBLI improves their position with respect to each statistic Statistic Proportion   Loaded & Unsubsidized Subsidized Mean 0.232 1.000 Variance 0.359 Skewness 0.817 Semi-Variance 0.374 0.609 Jensen, Barrett & Mude 2014

IBLI Impacts: Livestock productivity/income IBLI (FE-IV) Production strategies: Herd Size -2.639 (2.190) [0.079] Veterinary Expenditures (KSH) 592.1** (295.2) [0.090] Household is Partially or Fully Mobile 0.184 (0.142) [0.247] Production outcomes: Milk income (KSH) 4,605** (1,995) [0.161] Milk income per TLU (KSH) 671.3*** (197.8) [0.170] Livestock Mortality Rate (X100) -0.0466 (0.0512) [0.175] A complete list of covariates, coefficient estimates, and model statistics can be found in Jensen, Mude & Barrett (2014). Clustered and robust standard errors in parentheses. R2 in brackets. *** p<0.01, ** p<0.05, * p<0.1. IBLI coverage: Increases investments in maintaining livestock through vet expenditures Increases total and per TLU income from milk. Note: TLU veterinary expenditures are pos/sign related to milk productivity Jensen, Mude & Barrett 2014 21

IBLI Impacts: Less adverse post-drought coping Marsabit HHs received IBLI indemnity payments in October 2011, near end of major drought. Survey HHs with IBLI coverage report much better expected behaviors/outcomes than the uninsured: 36% reduction in likelihood of distress livestock sales, especially (64%) among modestly better-off HHs (>8.4 TLU) 25% reduction in likelihood of reducing meals as a coping strategy, especially (43%) among those with small or no herds IBLI appears to provide a flexible safety net, reducing reliance on the most adverse behaviors undertaken by different groups. Janzen & Carter 2013 NBER

IBLI Impacts: Household subjective well-being Borana survey HHs report subjective well-being In principle, insurance helps risk averse people even when it doesn’t pay out. But an imperfect product with commercial loadings might not. Subjective well-being measures to assess welfare gains even w/o indemnities. IBLI has a positive, stat sig effect on HH well-being, even after premium payment and w/o any indemnity payments IBLI coverage for 5 TLU moves a HH 1 step up the SWB scale Ex post of contract, purchasers exhibit some buyer’s remorse in the absence of indemnity payments. But the positive effect of IBLI coverage is significantly higher than the negative effect of buyer’s remorse. Hirfrot , Barrett, Lentz and Taddesse. 2014 23

Summarizing IBLI Program Although IBLI offers incomplete and imperfect coverage against herd loss, IBLI has clear favorable impacts on purchasers. IBLI offers a promising option for addressing pastoralist vulnerability and poverty arising from catastrophic drought risk. Positive impact results help provide strong evidence base in support of public support to insurance programs covering drought risk for pastoralist IBLI can, in principle, offer a timely, sustainable, safety net against catastrophic drought shocks. Can help accelerate herd recovery and reduce human suffering. ILRI working together with World Bank’s Agricultural Insurance Development program to support Government of Kenya’s effort to rollout the Kenya Livestock Insurance Program (KLIP) for Kenya’s pastoralists Critical to the success of the KLIP will be capacity building across the various key actors in the value chain and a comprehensive extension and sensitization campaign

Other Key Complementary Activities for 2015 Developing Web-based Systems Automating IBLI Contract Design, Index Updates, Information Provision Using ICT/Mobile-applications to assess impact of extension and monitoring interventions for IBLI sales agent Developing the Extension and Capacity Agenda for the Kenya Livestock Insurance Program Agenda Crowd-Sourcing of Rangeland Conditions Investigating other related research topics Livelihood portfolio diversification Livestock market integration Forage and feed supplementation markets Village livestock banking

Crowd-Sourcing Rangeland Conditions OVERVIEW: There is a need for higher temporal and spatial resolution data on the environmental conditions and nutritive value of rangelands to improve the information content with receive from satellite-based data. As mobile technologies and networks improve, it raises the possibility of live crowd-sourcing such information on a board scale. PROJECT OBJECTIVE: Citizen Science proof-of-concept to understand how we may incentives pastoralists to provide regular, accurate, real-time, micro-level data on the conditions of the rangelands. POTENTIAL OUTPUTS: Identify spectral signatures that ca be used to develop filters for remotely sensed data for the purpose of improve IBLI design. Dataset that can feed into research on topics such as land use, resilience, social coordination and interaction, resource selection, citizen science, extension etc. Forage condition maps that can update in near-real time for pastoralists’ herd and range management and for agencies’ early warning systems.

Crowd-Sourcing Rangeland Conditions Conceptual Approach for Developing Rangeland Conditions Model

Crowd-Sourcing Rangeland Conditions Procedural Approach for Developing Rangeland Conditions Model

Web-Based Contract Design and Assessment Tool TASK: Build a Web-Based Platform to: automate data receipt and index updating procedures; automate contract-related information dissemination protocols across a range of output and format types; and allow for real time analysis of contract performance Key Work Elements: Index Automation Module: Provide near-real time automated updates on the status of the index across all program areas. Contract Design and Assessment Module: Develop functionality that allows users to manipulate various contract features and test their impact on key contract parameters Information Provision and Dissemination Module: Allow for index and other relevant program data to be regularly updated, queried and disseminated in a suite of output types to be jointly agreed with the project team.

For related information, visit www.ilri.org/ibli Many thanks for your support, interest and comments STAY TUNED! Thank you For related information, visit www.ilri.org/ibli