Presented by Andrew Mude at the Workshop on The Future of Pastoralism in Africa: International Conference to Debate Research Findings and Policy Options, Addis Ababa, 21-23 March 2011.

1. Index Based Livestock Insurance Protecting pastoralists against mortality losses due to severe forage scarcity Andrew Mude The Future of Pastoralism in Africa Addis Ababa, March 21-23, 2011

2. Setting the Context Pastoralist Risk Management CRSP (PARIMA): Among its many lessons we learn that…. …..Pastoralists are very vulnerable to widespread forage scarcity …. livestock mortality due to forage scarcity is by far the biggest risk. Causes of Livestock Mortality Borena Zone Marsabit District

6. Prevent downward slide of vulnerable populations

7. Stabilize expectations & crowd-in investment and accumulation by poor populations

8. Induce financial deepening by crowding-in credit supply and demand

9. But can insurance be sustainably offered in remote infrastructure deficient areas and to smallholders?

10. Conventional (individual) insurance unlikely to work, especially among pastoralists:

11. Transactions costs

13. No transactions costs of measuring individual losses

14. Preserves effort incentives (no moral hazard) as no single individual can influence index.

15. Adverse selection does not matter as payouts do not depend on the riskiness of those who buy the insurance

16. Available on near real-time basis: faster response than conventional humanitarian relief

18. From Theory to Practice DESIGNING THE INDEX Need to model a relationship between the risk to be insured and the index  The Response Function The challenge of data availability

19. From Theory to Practice TESTING INDEX PERFORMACE Minimizing “BASIS Risk”: How well does the index correspond to the outcome it is measuring? How well does the index correspond to individual outcomes?

22. From Theory to Practice CONTRACT FEATURES: RISK COVERAGE AND PRICING Need to select an index strike point to trigger indemnity? Trade off: Higher Strike  Lower Risk Coverage  Lower Cost Conditional or Unconditional? Payoff structure: Linear, Segmented, All or nothing, No claims bonus? ations

23. From Theory to Practice INNOVATIONS INCENTIVES Catalyzing the Market Enabling Regulation Engaging Stakeholders Private vs. Public, or Partnership?

24. From Theory to Practice ESTABLISH INFORMED EFFECTIVE DEMAND Insurance is a difficult product to sell Insurance is a foreign concept to relatively uninformed target Initial significant investment in extension and marketing Simulation games with real information and incentives

25. From Theory to Practice LOW COST DELIVERY Identify mechanism to deliver product to client What sales delivery platform? What information delivery platform? IMPACT ASSESSMENT Does Index-Insurance deliver the social and economic benefits it promises? Need a rigorous research design to allow quantification and attribution of impacts? M&E to guide scale-up

26. Thank you For more information please visit: www.ilri.org/ibli/

27. Contract Sales for Marsabit for the 2010

29. Policy holders paid based on external “index” that triggers payments to all insured clients

30. Suited for risks affecting a large number of people simultaneously and for which a suitable index exists.

31. No transactions costs of measuring individual losses

32. Preserves effort incentives (no moral hazard) as no single individual can influence index.

33. Adverse selection does not matter as payouts do not depend on the riskiness of those who buy the insurance

35. Piloting in Marsabit and Borena 4-pronged effort to develop, implement and evaluate IBLI FEASIBILITY STUDY CONTRACT DESIGN PRODUCT DELIVERY IMPACT ASSESSMENT

36. Feasibility Study Basic prerequisites to feasibility need to be made: Is the relevant data available? Are necessary stakeholders interested and committed (government, regulators, insurance companies, client representatives) Is this something the community will embrace and desire? Is the community willing to pay for the product?