Bite-size Case Study

Index-based livestock insurance

Published on June 30, 2019 Originally recorded 2016   9 min
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This case study helps explain a bit more, why insurance can help, how insurance can be designed, how, in particular, index insurance can be designed in an area where conventional indemnity insurance didn't appear, and what seemed to be the impacts of the development of such a policy. Index-Based Livestock Insurance, which commonly goes by the acronym IBLI, was first commercially piloted beginning in January 2010 in Northern Kenya, an area known as Marsabit, and a couple of years later, beginning in August 2012, it was redesigned and piloted commercially in the neighboring area of Southern Ethiopia called Borana. The technical design for this work took place within my research group at Cornell in collaboration with the lead research group at the International Livestock Research Institute, ILRI, which is based in Nairobi, Kenya, along with partners at a couple of other universities. We designed these contracts to attend to drought shocks that hit in the dry lands of the Horn of Africa with some regularity and often precipitate massive humanitarian disasters. These are areas that depend heavily upon rainfall that it varies across space and time, and the rainfall, in a good year, is insufficient to grow crops reliably. So typically, these are people who rely entirely on extensive grazing of livestock. What are commonly referred to as pastoralists. So these insurance contracts were developed to help pastoralists, such as those displayed in the photographs on the slide, to help those pastoralists to manage the catastrophic risk associated with major droughts. Major droughts strike this area with some regularity, seemingly, with increasing regularity since climate change has begun, and those droughts commonly wipe out 20-30, sometimes as much as 50 percent of the herd, in an area and leave already poor people in fairly dire straits. So we developed these contracts as a way to help to leverage global capital markets to take up some of the risks faced in this system populated by lots of poor people and to help accelerate recovery by being able to inject cash into a system quickly in response to drought shocks where otherwise they wait months for food aid to arrive from Europe, and North America, and Asia. So the contract is developed by, and underwritten by a private insurance company. In Kenya, it has been underwritten by a couple of different companies. We now have that product available in several different counties around Northern Kenya. In Ethiopia, it's been underwritten by a group called the Oromia Insurance Company. Those individual insurance underwriters, these private companies, send agents out into the countryside who sell insurance policies. You see an example in the slide of a simple receipt provided to an insurance purchaser in Northern Kenya in 2011. The insurance brokers will go around with a small handheld device, and people pay them for their insurance contract, they upload the information, they print out a receipt, and the individual has that receipt as documentation of their insurance policy. The insurance companies pass much of that risk into the global marketplace by using global reinsurers. So effectively, what we're doing is we're taking rainfall risk in Southern Ethiopia,or Northern Kenya and we're passing it into European and North American capital markets through underwriters backed by global reinsurers. We've adapted this model for several different areas of Kenya and Ethiopia, and now we have a Sharia compliant version for Muslim herder areas in North-Eastern Kenya.