Agricultural Insurance Protecting Pastoralists Against Drought-Related Risks Andrew Mude, International Livestock Research Institute ASAL Stakeholders Forum September 2013

The Case for Agricultural Insurance Agricultural risks affect many smallholder farmers; undermining their livelihoods Climate variability has increased; natural hazards increasing in frequency and intensity agricultural risks have become real requiring urgent attention Insurance offers farmers an opportunity to transfer risks to financial markets ASAL’s have historically been the most vulnerable to drought risk and the greatest recipients of aid To fully unlock potential and unleash productivity-led growth, must deal with risk

The costs of uninsured risk Systemic Drought exposure: 28 Droughts last 100 years, 4 in last 10 years Frequency and Intensity increasing : 4 consecutive years drought: –Total value damages and losses US$ 12.1 billion –Agriculture US$ 1.51 billion (12.5%) –Livestock US$ 8.74 billion (72.2%) –9% national livestock herd died – mostly cattle Food Insecurity due to drought: –2009 = 3.8 million people –2011 = 3.75 million people affected, 1.8 million in marginal crop areas 1.9 million people in marginal pastoral areas Total Value Drought Losses US$ 12.2 billion This magnitude of drought damage and losses to agriculture and livestock cannot be financed out of GOK’s budget and by the Donor community only.

The incidence and impact profile of risk Flood is the most commonly reported event Drought affects by far the largest Number of People Source EM-DAT 1970 to to 2013

Institutional Commitments to Manage Risk Government Policy Establish a national agricultural and livestock insurance and introduce an acceptable livestock evaluation systems that would make it easier for pastoralists to access credit Launched the National Agricultural Insurance Policy Taskforce (NAIP) The mission of NAIP is to assist farmers to broaden their risks management options, in order to increase productivity, stabilize farm incomes, and reduce food insecurity. Harmonized with ongoing or planned support for the agricultural sector related to e.g. farmer education, value chain development, weather and market information systems and post-disaster support. Contribute directly to increased productivity, commercialization and competitiveness of agricultural value chains aimed at promoting export and creating employment.

Institutional Commitments to Manage Risk National Policy for the Sustainable Development of Northern Kenya and other Arid lands emphasizes: The need to build the foundations for development in the ASALs by investing in the structures and systems to spur productivity and innovation which include disaster risk management The need to rethink institutional and financing mechanisms in order to enhance coordination of investments and reorient investment towards risk reduction and resilience. Efforts to develop NAIP must coordinate with established and envisioned structures: National Drought Management Authority (NDMA) Livestock Insurance Fund National Disaster Management Authority (NaDiMa)

The challenges of Insurance Market failure: non-availability of private-sector agricultural crop & livestock insurance. Capacity constraints: of private commercial insurers, particularly for systemic risk (drought, flood, epidemic diseases, etc). High costs insurance administration: for small farmers. Affordability: Inability of farmers to afford agricultural crop & livestock insurance premiums. The above Constraints are most applicable to developing countries and even more so in remote, infrastructure deficient ASALs? This is why GOVERNMENT SUPPORT TO AGRICUTURAL INSURANCE is imperative to catalyze the industry.

Potential Roles of Government in Providing Support to Agricultural Insurance Provide Legal & Regulatory Framework Enhancing Data & Information Systems Education and Capacity Building Research & Development (Products) Public Premium Subsidies Catastrophic Risk Sharing / Risk Financing

The case of Index-Based Livestock Insurance

The Case of Index Based Livestock Insurance An innovative insurance scheme designed to protect pastoralists against the risk of drought related livestock deaths First launched in Marsabit in Jan 2010 Launched in Southern Ethiopia – Borana Zone in July 2012 Scaled to Isiolo and Wajir in August 2013

Motivating IBLI: Centrality of Livestock Economy and Risk Profile Data source: Project baseline 2009 (924 Marsabit Households) 1.Livestock is the principle asset and key source of income 2.Pastoralists carry a heavy risk burden of which severe drought is the greatest 3.Drought-related livestock mortality is the greatest source of vulnerability

What is Index Based Insurance? New innovation in insurance avoids problems that make traditional insurance unprofitable for small, remote clients: Policy holders paid based on external “index” that triggers payments to all insured clients Suited for risks affecting a large number of people simultaneously and for which a suitable index exists. –No transactions costs of measuring individual losses –Preserves effort incentives (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. However opportunistic behavior. –Problem of “basis” risk

Why IBLI? Social and Economic Welfare Potential  An effective IBLI program can: Prevent downward slide of vulnerable populations Stabilize expectations & crowd-in investment by the poor Induce financial deepening by crowding-in credit S & D  But can insurance be sustainably offered in remote infrastructure deficient areas and to smallholders?

Based on satellite data on forage availability- NDVI, this insurance pays out when forage scarcity is predicted to cause livestock deaths in an area. DATA Livestock Mortality Satellite data on forage availability Response Function Index Predicted Livestock Mortality Designing IBLI

Implementing IBLI  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). EXTENSION, SALES…

Extension How to ensure demand is well informed? How to build trust? How to deliver relevant education content cost effectively? How to improve product value?

Sales How to improve reach and coverage to a sufficient density of clients? Initial manual sales costly and unsustainable Potential of phone app-based sales transactions platform? Options for improving cost-efficiency and reach of agents

ILRI’s Role Overarching Goal: To enhance livelihoods and reduce the vulnerability of pastoral populations. Specific Project Purpose: Generate a critical mass of informed pastoralists purchasing IBLI products that are mediated by a capacitated insurance industry within a supportive policy and institutional environment.

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