Protecting Pastoralists from the Risk of Drought Related Livestock Mortality: Piloting Index-Based Livestock Insurance (IBLI) in Northern Kenya WANDERA BRENDA International Livestock Research Institute (ILRI) ISAC workshop on 5th May 2011 in Addis Ababa, Ethiopia

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

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 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)

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: 1.Highly correlated with livestock mortality 2.Reliably and cheaply available for wide range of locations 3.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, zndvi ( ) Historical droughts Data

Geographic Clusters 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 structure of IBLI contract and cumulative standardized NDVI Product Design

Performance of Predicted Livestock Mortality Index

Challenges in using NDVI AVHRR NDVI processing- had to test various alternatives mid stream. Consulted VITO. Eventually chose MODIS over AVHRR. None of the project team members are RS experts. It is likely not maximize on capabilities for predictive modeling We may improve by removing various errors in our signal (reflectance, cloud cover etc) to enhance current forage signal with a combination of relevant RS variables. Need to identify an independent institution with the capacity to verify the index, certify and possibly announce on behalf of the market

Thank you. For more information, please visit

From NDVI to index update and announcement 1.Download new MODIS NDVI every 16-days 2.Calculate update or final value of predicted livestock mortality index 3.Send results to implementation partners to disseminate information to pastoralists

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 Ksh in Lower Marsabit

Contract Sales Jan/Feb 2010 PREMI UM RATE CONT RACTS 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) UPPER5.50% , , ,071,5001,433,933 LOWER3.25%1,4233,5374, , ,406,5002,060,711 TOTAL 1,9793,90815, , ,478,0003,494,644 Large number of uptake On average, small herd size (TLU) insured Small size as business, need to grow Lack of understanding or misunderstanding of the product