World Bank Group Mongolia Livestock Insurance Indemnity Pool Olivier Mahul Senior Insurance Specialist Financial Sector Operations and Policy Department World Bank Catastrophe Risk Financing Seminar Washington DC October 27, 2005

World Bank Group 2 Country Agricultural Risk Management Agri-business segmentation Social vs commercial insurance Traditional farming sector Emerging farming sector Commercial farming sector Agricultural risk assessment Probabilistic catastrophic risk model Agricultural Risk Financing Risk layering Insurance index Insurance pool Insurance and rural finance Institutional capacity building Data management Regulatory/supervisory framework Information and education Technical expertise

World Bank Group 3 Government Capital Support Int’l capital and reinsurance markets Agricultural Insurance Pool Domestic Insurance Companies Farmers/Herders Government Structured Relief International Donors Development Banks National agricultural insurance pools may be a potential way forward Rural Banks/MFIs

World Bank Group 4 Action Plan n Information and education t Reduce widespread lack of insurance culture n Enabling legal framework t Provide incentives for selling and purchasing agriculture insurance n Institutional structure t Define the role of each stakeholder (farmers’ groups, government, domestic insurance industry, international reinsurance industry,, etc.) n Data management t Build an efficient data management system n Technical expertise t Contract design, rate making n Financial capacity t International markets, governments as reinsurers of last resort, etc.

World Bank Group 5 Livestock Insurance in Mongolia n The animal husbandry in Mongolia represents 87% of agricultural GDP and 30% of total GDP n 11 million animals lost in due to severe weather conditions (dzud) n Livestock size in 2003: t 23 million heads (83% sheep and goat) t About USD 1 billion of value

World Bank Group 6 Index Based Livestock Insurance Project Description n Request from the Government of Mongolia t The development of livestock sector is a priority t Livestock exposure to catastrophic events (dzuds) n Rationale for Bank involvement t Global experience of innovative approaches to insurance for catastrophic events and index-based insurance t Complements the ongoing Sustainable Livelihood Project n Lending operation t 3 year pilot program t IDA Specific Investment Loan of US$7.75 million approved in May 2005 t Contingent debt facility of US$5 million

World Bank Group 7 Index Based Livestock Insurance Objectives n Affordable and effective insurance t Provide affordable and effective livestock insurance to all herders on a voluntary basis n Flexible institutional structure t Simple and stable structure for implementation in the short run that allows for flexibility in the future n Ring fence livestock insurance business t Insulate the domestic insurance industry from catastrophic livestock losses t Ensure timely, full indemnity payments (no default risk) n Foundation consistent with the new regulatory environment n Limit government financial exposure

World Bank Group 8 Insurance Index Selection n Individual livestock insurance t Impossible to know who owns which animals t Moral hazard, adverse selection, high administrative costs n Weather insurance t Incomplete and unreliable historical weather data t Complex relationship between weather events (dzuds) and livestock mortality n Index-based mortality insurance t Detailed annual animal census (by sums and species) t Adult animal mortality data organized and audited every year t 34 years of data Unfeasible Unfeasible

World Bank Group 9 Livestock Risk Layering n DRP : Social insurance t Monetary compensation in case of extreme catastrophic events t Herders pay small fee t Funded by GoM and donors t Voluntary participation n BIP : Commercial insurance t Sold by approved commercial insurers t Regulated by GoM t Herders pay a commercial insurance premium t Voluntary participation Disaster Response Product Base Insurance Product Retained by Herders and Banks 10% mortality 30% mortality 100% mortality

World Bank Group 10 Livestock Risk Financing n Objectives of Financing structure t Protection of insurance companies for too much exposure when selling BIP t Protection of other lines of business t Protection of herder premiums t Assurance that all indemnity payment are paid in full n Livestock Insurance Indemnity Pool t Contractual arrangement between the participating insurance companies and the Government t Pre-paid indemnity pool t Compulsory unlimited reinsurance provided by the Government at fair price t Incentives for insurers to collaborate

World Bank Group 11 Livestock Insurance Indemnity Pool Herders’ self- retention Disaster Response Product Base Insurance Product Livestock Insurance Indemnity Pool Government reinsurance stop loss GIC Herders’ insurance premiums net of reins. prem. Reinsurance premiums World Bank Contingent Debt Facility Loss frequency 15-20% 3-5%

World Bank Group 12 Livestock Insurance Indemnity Pool BIP DRP

World Bank Group 13 Livestock Insurance Indemnity Pool LIIP reserves Unlimited stop loss Insured losses Insurers’ profit Small and medium collective insured losses Large collective insured losses LIIP reserves Unlimited stop loss Insured losses

World Bank Group 14 Pilot Aimags BayankhongorKhentiiUvs # animals1.2 mm1.4 mm1.5 mm Value at risk (US$)33.5 mm55.3 mm43.8 mm Average AL (% VaR)5.7%4.7%5.1% Std AL (% VaR)7.1%3.3% Uvs Bayankhongor Khenti Key objectives n Test the product design n Learn if herders will buy the insurance n Learn if insurance companies have an interest in selling and the capacity to manage this unique insurance

World Bank Group 15 IBLI: Risk financing strategy

World Bank Group 16 Long Run Transition n Transition out of pilot phase is subject to pilot performance n Greater market integration n Move towards commercial reinsurance n Increase responsibilities of insurance companies and government regulatory agency n Integration with microfinance and NGO initiatives

World Bank Group 17 Challenges for Long Term Sustainability n Creating effective rules and regulations n Strengthening insurance industry n Strengthening insurance supervision n Accessing the global reinsurance market n Linking premium rates to stocking rates n Improving the quality and verification of the official livestock statistics n Educating stakeholders: herders, insurance companies, government n Creating incentives for the insurance market to sell, service, and share risk in Mongolian livestock insurance

World Bank Group 18 Thank you for your attention