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Protecting Pastoralists from the Risk of Drought Related Livestock Mortality:
Piloting Index-Based Livestock Insurance (IBLI)in Northern Kenya
WANDERA BRENDAInternational Livestock Research Institute (ILRI)
www.ilri.org/ibliISAC workshop on 5th May 2011 in Addis Ababa, Ethiopia
Managing Risk in the ASALs
• Arid and Semi-Arid Lands (ASAL) residents, particularly in Northern Kenya, confront harsh and volatile environments.
• High level of risk:– Droughts, Diseases, Conflict
• Low levels of capacity:– Infrastructure deficient– Few alternative livelihood opportunities
• Livelihoods are primarily based on livestock
Impact of Drought on Livelihoods
• Livestock is both the principal asset and source of income for the vast majority of ASAL residents
• Drought is the single greatest cause of livestock mortality
• Most drought related livestock mortality occurs under severe conditions
0
100
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800
June 2000 Sept. 2000 Dec. 2000 March2001
June 2001 Sept. 2001 Dec. 2001 March2002
June 2002
Other
Bad Water
Rain
Old Age
Killed to protect mother
Accident / injury
Predator
Disease
Pasture / drought / starvation
44%
10%4%
15%
14%
6%
4% 2%
Milk
Livestock Sale
Slaughter
Food aid
Salary/ wage
Cultivation
Trade
Gift
44%
10%4%
15%
14%
6%
4% 2%
Milk
Livestock Sale
Slaughter
Food aid
Salary/ wage
Cultivation
Trade
Gift
Proportion of total income by source
Livestock mortality by cause
Insurance and Agricultural Development
• Risk and shock of livestock mortality due to drought imposes considerable economic and welfare costs on pastoralists
• Sustainable insurance can mitigate this risk and shock• But can insurance be sustainably offered in the ASALs?• Conventional insurance cannot be sustainable,
especially in remote pastoral area such as Marsabit and Northern Kenya
– Transactions costs– Moral hazard/adverse selection
Index Based Insurance
• New innovation in insurance avoids problems that make traditional insurance unprofitable for small and remote clients:
• Policy holders paid based on external “index” that triggers indemnity payouts to all insured clients
• Suited for risks affecting a large number of people simultaneously and for which a suitable index exists.
• Advantages• No transactions costs of measuring individual losses
• 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
• Disadvantage
• Problem of “basis” risk (gap between each individual’s actual loss and the index)
DESIGNING AN INDEX • Need to model a relationship between the risk to be insured and the
index The Response Function
• Need for a measure that is:1. Highly correlated with livestock mortality2. Reliably and cheaply available for wide range of locations3. Historically available
• The challenge of data availability
The index
DATA•Livestock Mortality
•NDVI
Response
Function
Index•Predicted Livestock Mortality
NASA NDVI Image Produced By: USGS-EROS Data Center. Source: Famine Early Warning System Network (FEWS-NET)
NDVI February 2009, Dekad 3 Deviation of NDVI from long-term average February 2009, Dekad 3
Laisamis Cluster
-3-2-1012345
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Karare
Logologo
Ngurunit
Korr
Laisamis Cluster, zndvi (1982-2008)
Historical droughts
Data
Geographic Clusters
KARGI
SHURA
MAIKONA
BUBISA
TURBI
ILLERET
GALAS
SABARET
KOYA
DARADE
NORTH HORR
DUKANA
EL GADE
KORR
KURUGUM
BALESA
LAISAMIS
EL-HADI
FUROLE
KALACHA
HAFARE
GAS
HURRI HILLS
LOIYANGALANI
KURUNGU
LONTOLIO
ARAPAL
LOGOLOGO
QILTA
MT. KULAL
MOITE
GUDAS/SORIADI
KARARE
IRIR
NGURUNIT
LARACHI
KAMBOYESOUTH HORR(MARSA)
LONYORIPICHAU
SONGA
MERILLE
ILLAUT(MARSABIT)
HULAHULA
MAJENGO(MARSABIT)
OGUCHO
OLTUROT
JALDESA
KITURUNIDIRIB GOMBO
JIRIME
SAGANTE
Upper Marsabit Contract
Legend
IndexDivision
Index Division
Central and Gadamoji
Laisamis
Loiyangalani
Maikona
North Horr
Lower Marsabit Contract
Legend
IndexDivision
Index Division
Central and Gadamoji
Laisamis
Loiyangalani
Maikona
North Horr
• Estimate separate response functions for distinct geographic clusters due to differences in herd composition, grazing ranges, water access, etc.
• Upper Marsabit (Chalbi)
• Lower Marsabit (Laisamis)
Temporal structure of IBLI contract and cumulative standardized NDVI
Product Design
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Period of continuing observation of NDVIfor constructing LRLD mortality index
LRLD season coverage SRSD season coverage
1 year contract coverage
Sale periodFor SRSD
Predicted SRSD mortality is announced.Indemnity payment is made if triggered
Period of NDVI observationsfor constructing SRSDmortality index
Prior observation of NDVI sincelast rain for LRLD season
Sale periodFor LRLD
Sale periodFor SRSD
Predicted LRLD mortality is announced.Indemnity payment is made if triggered
Prior observation of NDVI since last rainfor SRSD season
Short Rain Short Dry Long Rain Long Dry Short Rain Short Dry
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb
Period of continuing observation of NDVIfor constructing LRLD mortality index
LRLD season coverage SRSD season coverage
1 year contract coverage
Sale periodFor SRSD
Predicted SRSD mortality is announced.Indemnity payment is made if triggered
Period of NDVI observationsfor constructing SRSDmortality index
Prior observation of NDVI sincelast rain for LRLD season
Sale periodFor LRLD
Sale periodFor SRSD
Predicted LRLD mortality is announced.Indemnity payment is made if triggered
Prior observation of NDVI since last rainfor SRSD season
Short Rain Short Dry Long Rain Long Dry Short Rain Short Dry
Performance of Predicted Livestock Mortality Index
Challenges in using NDVI
• AVHRR NDVI processing- had to test various alternatives mid stream. Consulted VITO. Eventually chose MODIS over AVHRR.
• None of the project team members are RS experts. It is likely not maximize on capabilities for predictive modeling
• We may improve by removing various errors in our signal (reflectance, cloud cover etc) to enhance current forage signal with a combination of relevant RS variables.
• Need to identify an independent institution with the capacity to verify the index, certify and possibly announce on behalf of the market
From NDVI to index update and announcement
1.Download new MODIS NDVI every 16-days
2.Calculate update or final value of predicted livestock mortality index
3.Send results to implementation partners to disseminate information to pastoralists
Contract Premiums
• Premiums for contract with trigger level 15%, providing annual coverage with two potential payout periods
• 5.5% in Upper Marsabit• 3.25% in Lower Marsabit
• 1 Tropical Livestock Unit (TLU) = 1 cattle = 0.7 camel = 10 goats/sheep values at Ksh 15,000
• To insure 1 TLU for a year costs• 825 Ksh in Upper Marsabit• 487.5 Ksh in Lower Marsabit
Contract Sales Jan/Feb 2010
PREMIUM RATE
CONTRACTS SOLD
CATTLE NO. INSURED
SHEEP/ GOATS NO. INSURED
CAMELS NO. INSURED
TOTAL TLU INSURED
AVERAGE TLU INSURED
TOTAL VALUE OF INSURED LIVESTOCK
TOTAL VALUE OF COLLECTED PREMIUMS
(KSh) (KSh)
UPPER 5.50% 556 371 11,081 185 1,738 3.1 26,071,500 1,433,933
LOWER 3.25% 1,423 3,537 4,745 154 4,227 3.0 63,406,500 2,060,711
TOTAL 1,979 3,908 15,826 339 5,965 3.0 89,478,000 3,494,644
• Large number of uptake• On average, small herd size (TLU) insured• Small size as business, need to grow• Lack of understanding or misunderstanding of the product