Explaining index‐based livestock insurance to pastoralists

Abstract

Livestock production in arid and semi-arid rangelands is a risky enterprise. Covariate risk of catastrophic livestock loss due to drought is the most critical uninsured risk facing livestock producers. These losses can lead to persistent poverty. We are trying to design an index based livestock insurance (IBLI) program as a viable means to help pastoralists in northern Kenya manage such covariate risk of livestock losses due to drought. A predicted livestock mortality index -established from a statistical relationship between satellite-generated vegetation imagery and historical records of community level livestock losses -represents an objectively, cost effectively measured and non-human manipulable index that triggers insurance payout. The insurance is offered by private insurance companies. The advantages of reduced transaction costs and asymmetric information problems, however, come at the cost of increased basis risk, which refers to the imperfect correlation between an insured"s loss experience and the index. We have developed a game that explains to pastoralists how such an insurance product could work. We built in the game both covariate and idiosyncratic shocks, and use a subsistence constraint to generate bifurcating asset dynamics, observed empirically in the targeted communities. This paper describes how the game was designed, how it was used in the field, and presents findings on how individuals played the game. The paper concludes by discussing how these findings are being used in the design and broader extension of the index based insurance product.3 Introduction:

Evidence of Demand for Index Insurance: Experimental Games and Commercial Transactions in Ethiopia

“…The game design is very similar to other contemporary experimental games efforts, such as Clarke et al (2012), which offer index insurance alongside other risk management options. Our game is also similar to other recent initiatives, such as McPeak, Chantarat, and Mude (2010) and Carter et al (2008), in that it was designed to accomplish multiple goals; that is educating consumers as to the details of the index insurance as well as informing project design. For example, the community risk pool option in the game is a first step towards understanding the role of localised decision making in managing risks.…”

A field study for assessing risk-contingent credit for Kenyan pastoralists and dairy farmers

“…This is done in the spirit of McPeak et al (2010) who describe how 'games' were used to educate pastoralist in Kenya's indexed based livestock insurance scheme (see Chantarat et al 2013). Thus, our approach is more qualitative than quantitative, but is a useful addition to the agricultural finance/risk/development literature by illustrating and describing how baseline information can be gathered in a pragmatic way.…”

An integrated agro-ecosystem and livelihood systems approach for the poor and vulnerable in dry areas

“…The project conducted extensive survey work and worked with the target community in a participatory process to identify constraints and possible entry points. Once IBLI was identified as a candidate intervention, the project worked to: identify institutional innovations needed to support this new concept in insurance provision and financial service delivery; established partnerships with commercial entities, regulatory bodies and other agencies; established novel public-private agreements for market-mediated provision of the product; and, initiated extension and marketing efforts to educate the target clientele on a previously alien concept and new product (Lybbert et al 2010;Matsaert et al 2011;McPeak et al 2010;Notenbaert et al 2009;Ouma et al 2011).…”