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Livestock insurance: reducing vulnerability

Dzud conditions have a devastating impact on livestock (E.Erhembayar)
Dzud conditions have a devastating impact on livestock

A severe summer drought, followed by winter temperatures of minus 40-50°C, has resulted in the loss of an estimated 8 million animals - about 17 per cent of Mongolia's livestock. The extreme conditions, known as dzud, have had a devastating impact in a country where 40 per cent of the population depend on livestock. In northern Kenya, pastoralists have also recently experienced one of the worst droughts in decades - the fourth severe drought in the last ten years.

Until recently, pastoralists faced with extreme conditions had to rely upon traditional coping mechanisms and support from governments and international agencies. However, two index-based livestock insurance (IBLI) programmes are providing pastoralists in Mongolia and Marsabit District in northern Kenya with the tools to help them cope with climate-related risks.

Spreading the risk

In 2002, Batbayar Davaadorj lost 30 per cent of his livestock as a result of dzud, but he is now one of 5,000 herders who in 2009 bought insurance to protect themselves against future livestock losses. "This is very important because even though we have harsh winters, I am insured and that is important," he explains. Under the innovative pilot project which began in 2005 - a partnership between the government and local insurance companies, with assistance from the World Bank - indemnities are paid to herders when the livestock mortality rate in their local district (soum) exceeds six per cent.

Insurance protects pastoralists against future livestock losses (Sabine Schmidt)
Insurance protects pastoralists against future livestock losses
Sabine Schmidt

While insurance companies cover the losses above six per cent, mortality rates over 30 per cent are borne by the government. "This system provides strong incentives to individual herders to manage their herds to minimize the impacts of major dzud events," explains Olivier Mahul, programme coordinator of the Insurance for the Poor Programme at the World Bank. "If a herder has no losses when his or her neighbours have had large losses, the better herder is rewarded for the extra effort by receiving a payment based on the area livestock mortality losses." Financial institutions have also been offering loans with lower interest rates to those herders who have purchased insurance.

Following the success of the pilot project, the World Bank approved additional funding of US$10 million in February 2010. "This scaling up will allow herders to focus on livestock quality, instead of quantity, by not having to worry about keeping large herds as a way of protecting themselves from losses," explains Andrew Goodland, senior agriculture economist at the World Bank. With the new funding, the ILBI programme is being expanded with the aim of reaching all 21 provinces (aimags) by 2012.

Coping with change

Whereas Mongolia's IBLI programme is based on rates of livestock mortality, this is not feasible in northern Kenya where data are not widely available. Instead, in a pilot project in Marsabit District, satellite images of vegetation are being used to determine when claims should be paid out. "Payments are made when the satellite images show us that forage has become so scarce that animals are likely to perish," says project leader Andrew Mude from the International Livestock Research Institute (ILRI).

Pastoralists pay premiums of 3.25 or 5.5 per cent of the value of their animals each year depending on how drought-prone their division is deemed to be. Under the scheme, pastoralists receive compensation if predicted mortality is above 15 per cent. Therefore, if the predicted mortality rate is 25 per cent, herders receive compensation amounting to ten per cent of the value of the animals they insured.

An insurance simulation game helps to explain the key features of the product (ILRI)
An insurance simulation game helps to explain the key features of the product

Even in the absence of drought, livestock insurance could also provide herders with the means to obtain credit from financial institutions that are currently unwilling to lend due to climatic risks. "Droughts are pushing pastoralist families into chronic impoverishment by inflicting losses which are increasingly difficult to recover from," Mude concludes. "Protection, in the form of insurance, could help stem the flow of pastoralists being pushed into poverty and give them the necessary confidence they need to invest in securing their herds."

With high demand from pastoralists, and the insurance companies keen on implementing a similar product in other Kenyan districts, ILRI believes this is a concept that can be scaled up and moved into other pastoral areas of Kenya, the Greater Horn of Africa, West Africa and India. "The fact that this project uses freely available satellite imagery data, makes this kind of product feasible in many countries and regions," observes Brenda Wandera, project development manager at ILRI.

Date published: July 2010


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