IndexBased Livestock Insurance Project - World Bank Group

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World Bank Group World Bank Group

Mongolia IndexBased Livestock Insurance Project

Assessing and Addressing Agricultural Risks ARD Week, March 2008

Nathan M. Belete

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World Bank Group World Bank Group Country Context

n GNI per capita of $880 (2006 GDP composition: industry 44%, services 35%, & agriculture 21%)

n high economic growth rates over the last couple of years, but significant poverty and inequality

n lowest population density in the world (3 times the size of France, but a population 24 times smaller)

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World Bank Group World Bank Group Livestock Sector

n livestock sector accounts for 87% of agricultural GDP and supports livelihood of over 50% of rural population

n while agriculture sector only accounts for 21% of GDP, it provides 39% of employment (7 of 10 jobs are from livestock activities)

n 33% of herders households determined to be poor, with a further 40% vulnerable to future poverty

n number of herding households doubled post collectivization

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World Bank Group World Bank Group Livestock Mortality in Mongolia

n extreme climatic events cause high rates of livestock mortality, significantly jeopardizing rural livelihoods

n from 1999 to 2002, a combination of droughts and severe winters (known as dzuds) caused loss of almost 11 million heads of livestock (almost 35% of total livestock in Mongolia)

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World Bank Group World Bank Group Project Rationale

n Majority of rural households lost almost 50% of their livestock during the period 1999 2002

n Impact of livestock mortality significant on the overall Mongolian economy (i.e. in 2001, livestock losses were about 15% of GDP).

n It is likely that the growth path of GDP was significantly negatively impacted by the events of 20002002.

n Getting structured cash payments to those who are damaged can mitigate some of these losses in the macro economy and improve access to credit.

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World Bank Group World Bank Group Objectives/Principles of IBLI Program

t A risk management solution that includes both government and the financial sector

t A structured mechanism by which the government can respond to extreme and catastrophic livestock losses

t Promote good livestock management practices for herders, including appropriate stocking rates

t Link IBLI to the direct outcome from dzud – high livestock mortality

t Ensure low administrative cost for insurance companies

t Guarantee indemnity payments to insured herders

t Clear, transparent guidelines for triggering indemnity payouts

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World Bank Group World Bank Group Pros and cons of indexbased products

Versatility

Reinsurance and financial structuring

Availability to small farmers

Can weather be predicted – need to sell well before the crop season

Standardized and transparent structure

Education and farmer acceptance Lower administrative costs (sales and loss adjustment)

Sustainability of the index (is the indexed data consistent)

Less adverse selection

Basis Risk (index payout may not exactly match actual crop loss)

Less moral hazard

Challenges of an index Advantages of an index

Index insurance tradesoff transaction costs for basis risk

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World Bank Group World Bank Group Project’s Development Objective

n The development objective of the IBLI project would be to ascertain the viability of indexbased livestock insurance in Mongolia. This would be achieved by:

t developing and piloting an IBLI program in three provinces of Mongolia; and

t by building institutional capacity and a legal framework for the prospective replication and scalingup of IBLI nationwide.

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World Bank Group World Bank Group Learning Objectives of the Pilot

n To assess if herders are willing to pay premiums at commercial rates for IBLI.

n To determine if insurance companies are willing to take the risk and have the capacity to organize sales of IBLI.

n To gauge the interest of the international reinsurance community in the pilot program.

n To provide capacity building for the insurance industry and the newly established regulator.

n To develop a new structured mechanism for responding to catastrophic risk management for the Government of Mongolia and how to use this new approach in a broader context of disaster assistance from both the Government and the donor community.

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World Bank Group World Bank Group Pilot Aimags (provinces) n Implementation is on going in 3 provinces: Bayankhongor,

Khentii and Uvs.

n Provinces were selected based on geographical dispersion, agroecological conditions, and relative risk (low correlation of livestock losses).

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World Bank Group World Bank Group IndexBased Livestock Insurance (IBLI)

t Voluntary participation t Sold by approved

commercial insurance providers

t Participating insurance companies pool their risk

t Index insurance based on animal mortality rates in each soum (smaller province)

t Government of Mongolia sells reinsurance to participating insurance companies

Commercial product Base Insurance Product (BIP)

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World Bank Group World Bank Group Base Insurance Product (BIP)

n Herders pay a premium based on number of animals reported (could insure less than value of all animals).

n Payments begin once a threshold of mortality is exceeded (710 percent).

n The threshold will vary by species and sum based on relative risk.

n BIP covers losses up to an established limit of 30 percent mortality.

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World Bank Group World Bank Group Insurance Products (cont.)

n Social product Disaster Response Product t Offered by the

Government of Mongolia

t Voluntary participation

t Herders pay small fee to register their animals

t Provides monetary compensation to herders when soum losses reach catastrophic level

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n Provides a system for structured, efficient disaster relief

n Funding for the DRP would come from GoM and IDA

n Distribution of payments would follow pre determined guidelines

n Under extreme conditions, payments would be made until funds are exhausted

n Careful attention to linking stocking rates and this product

Disaster Relief Product (DRP)

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World Bank Group World Bank Group IBLI Risk Financing

100% Mortality

30% or 25% Mortality

6% or 10% Mortality

Disaster Response Product

Base Insurance Product

Retained by Herders

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World Bank Group World Bank Group Financing for DRP/BIP Losses

Insurers GIC

paid into LIIP

Insurers GIC

paid into LIIP

March t April June August

Risk loaded

premium paid

into LIIP Risk loaded

premium

Insurers GIC

LIIP

Account

Equal to

105% of

risk loaded

BIP

premium

Reinsurance premiums

DRP fees

BIP

Reserve

July t+1

WB Credit or GoM Resources

BIP

Reserve

LIIP

Account

Equal to

105% of

risk loaded

BIP

premium

BIP

DRP

&

BIP

DRP Reserve

DRP

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World Bank Group World Bank Group IBLI Sales 2006 2008 2006 Sales

Total insured herders: 2,412

Total insured livestock: 292,000 heads (5.5%)

Total premium: 85.5 million MNT

Total indemnity: 1.8 million MNT

Insurance coverage: 56 districts of 3 provinces

Indemnity coverage: 2 districts of 2 provinces

2007 Sales


Total insured livestock: 409,000 heads (5.8%)


Total indemnity: 380 million MNT


Indemnity coverage: 35 districts of 3 provinces

2008 Sales


Total insured livestock: 489,900 heads (6%)


Total indemnity: (TBD in Summer ’09)


Indemnity coverage: (TBD in Summer ’09)

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IBLI products offered to 80% of total soums in project aimags Not applicable

100% 3 insurance companies operated

100% 4 insurance companies operated

Four insurance companies operated in all project aimags and surveyed soums, and sold livestock insurance products

60% of herders have contacted with IC representatives that offering BIP and DRP

None 56% 68.0% 68.0% of surveyed households to some extend have contacted with Insurance Companies and received information, services and/or insured their livestock

5.0% of herders in pilot aimags purchased BIP None 8.3% 12.8%

5.0% of herders in pilot aimags participated in DRP

None 0.3% 2.3% Herders who bought BIP are automatically registered under DRP without any additional fee. Number of Herders who bought only DRP was shown in the table.

Insurance Companies provided contractual payments into LIIP and BIP reserves as contractually required.

None 100% 100% Although this information was not included into AFBM scope, the Insurance Companies did make payment into IBLIIP completely.

50% of herders in project aimags have received knowledge from Face to Face Training

No data available 81% 80.4% 80.4% of surveyed herders were covered by facetoface training

75.0% of herders have aware of the IBLI products

No data available 51.9% 92.0% 36.5% of herders have good knowledge on BIP, 8.5% on DRP, 28.0% have on both products and in total 92.0% of herders have knowledge on offered insurance products.

100% of total indemnity payments received by herders

No data available 100% All herders in Naranbulag and Erdenetsogt soums, who insured their horses in 2006 were received their indemnity payment completely.

Project Achievements Second year criteria Baseline data Achievements

in 2006 Achievements

in 2007 Remarks

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The World Bank and Agricultural Insurance

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Key Areas of World Bank Support for Development of Agricultural Insurance

n Technical assistance for the insurance industry t Product development t Underwriting/loss assessment/ratemaking t Portfolio risk management

n Institutional capacity building t Data management t Knowledge transfer/training/extension services t Legal/regulatory framework

n Publicprivate partnership in the financing of catastrophic risk t Provide affordable and effective insurance to farmers/herders t Protect the domestic insurance industry against catastrophic losses

t Limit the government fiscal exposure t Facilitate local risk retention and access to international reinsurance

n World Bank financing t Contingent debt facility

IndexBased Livestock Insurance Project - World Bank Group

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