Sustainable Index-Based Livestock Insurance

Index Based Livestock InsuranceToward Sustainable Livestock Insurance for Pastoralists

Innovations in Index Insurance to Promote Agricultural and Livestock Development in Ethiopia

Addis, December 3, 2015

What we know about IBLI

• The (initial) IBLI contract – designed off ‘best-principles’ provides incomplete cover due to considerable “basis risk”….

• …nonetheless, IBLI demonstrably improves the lives of policy holders across a range of socioeconomic and psychological factors

• Provision of IBLI as part of a social protection package could yield larger impacts per cost than cash transfers alone

• Considerable evidence for proof of concept; but demand still disappointingly low.

Recap from Prof. Barrett’s presentation;

How to get to efficiently get to scale, sustainably?

COMPONENTS OF A SUSTAINABLE INDEX-INSURANCE PROGRAM (or BARRIERS TO SCALE)

1. Index design: Data demands (long term series, reliable, non-manipulable). Index precision (minimizing “basis risk”, maximizing value). Contract design – matching index to risk profile.

2. Establish informed effective demand, especially among a clientele with little experience with any insurance, but even for meso and macro actors. Extension, capacity development, marketing.

3. Low cost, efficient, delivery mechanisms (supply chain), to build critical mass of clients/recipients. Sales transactions platforms, information and extension, indemnity payments

4. Policy and institutional infrastructure. Regulations, oversight, effective coordination of public and private sector roles

First Index: Marsabit – January 2010 – January 2013• Response Function: Regress historic livestock mortality data onto

transformations of Normalized Differenced Vegetation Index (NDVI) – satellite-based proxy of forage availability

• IBLI Contract is for Asset Replacement: Pays out when forage scarcity is predicted to cause livestock deaths in an area.

IBLI Index Design

Product performance

• Quality of prediction is highest for more catastrophic drought events• 85-88% accuracy for average herd

losses of at least 20%, • Even with this subsequent study

calls contract precision into question, “basis risk”

DATA Response Function Index

Chantarat, Mude, Barrett and Carter (2013, JRI)

Upgrading IBLI Model for Scale Out• ALRMP Livestock Mortality Data – increasing gaps beyond Marsabit• Employ spatial methods to estimate district/division-specific index

response functions• Missing mortality observations will be filled in using spatial indexing scheme• Spatial lag model of estimate optimal response function

IBLI Index Design

• Rolled Out in August 2013• APA Insurance – Isiolo• Takaful Insurance of Africa – Wajir

• Deficiencies in precision – overestimated losses in March 2014

Woodard, Shee, Mude (2015, GPP accpeted

NDVI-based Forage Scarcity index• Complexity of design, data scarcity, and precision concern resulted in a move

to NDVI-only contracts.• Area-average seasonal availability of forage (NDVI) compared to historical seasons.

• First employed in Borena, S. Ethiopia from July 2012 by Oromia Insurance Company (no livestock mortality data)• Easier to explain, seemingly more precise, very easy to scale up• Planned to transition in Kenya

• Fast-track due to demands of the Kenya Livestock Insurance Program (KLIP) and collaboration with World Bank

• New Kenya Contract: Asset Protection – intervention prior to mortality• Payout at the beginning of the dry season rather than the end• Insured unit: cost to keep livestock alive during drought• APA Insurance (Marsabit and Isiolo), Takaful Insurance of Africa (Wajir, Isiolo, Mandera,

Garissa) launched asset protection contracts in January 2015

• Greater attention to the science of remote sensing

IBLI Index Design

Vrieling, Meroni, Shee, Mude, Woodard, and de Bie Rambold (2014, IJAEOG)Vrieling, Meroni, Mude, Chantarat, Ummenhofer and de Bie Kees(2015)

IBLI Contract Design – How to make the index suitable

Geographic Coverage – Delineating Index Units• Should be representative of how the risk covered manifests itself in the production

system and for the target population.• Must take into account operational, administrative and practical considerations.Temporal Coverage – Setting out potential payout periods• Dependent on the seasonality, production system, timing of risk impact and need

etc… Fitting the index to the risk• There are numerous ways to generate the index from NDVI (averaging across space,

cummulating across time, standardizing, filtering, ) and the various steps, and their sequencing, have a bearing on the index reading and thus risk coverage

Pricing (Payout Structure, Payout Frequency)• Risk coverage should be sufficient; reinsurance loadings need to be brought down

considerably; premium subsidy structure needs careful thought.

Contract design is the critical next step after index construction to ensure effective risk coverage for the target population

Index and Contract DesignOUTSTANDING ISSUES AND RESEARCH QUESTIONS

• How can we improve the information content of remote sensing indicators beyond biomass availability?

• Can new technologies help supporting the collection of ground truth/validation data?• Can we find more efficient methods for index spatial and temporal aggregation to

improve the relationships with household level impacts, while keeping the approach sufficiently general and understandable?

• How to guarantee long-term RS data continuity with changing Earth Observation platforms and sensors?

HOW TO GUARANTEE OR ASSESS THE QUALITY OF INDEX INSURANCE PRODUCTS• Growing proliferation of Index Insurance Products/Contracts. No clear signal of product

quality or risk-protection value (insurance or lottery).• Lack of clear mechanism for distinguishing quality offers disincentive for designing high

value contractCritical need for developing standard, universally accepted metrics for identifying and signaling product quality (e.g., bond rating agency) (Jensen and Barrett, 2015 Working Paper)

Establishing Informed Effective Demand

TWO KEY ELEMENTS

Initial targeting of risk and program coverage areas are critical. Are there credible reasons for expecting sufficient and scalable demand?

Capacity Building, Training, Extension and Marketing. Need for developing learning tools and building the capacity of the range of service providers and stakeholders. Generating informed demand requires product awareness and understanding.

Sounds like a good idea: Is it something pastoralists will really want, value or pay for?


Introduction to IBLI Using Experimental Games• Innovative way to introduce novel and

complex concept to unfamiliar population• Designed experimental game structured on

the pastoral production system• Pastoralists were eager and game increased

understanding and confirmed to researchers that it would be possible to explain

Investigating Demand and Willingness to Pay• Survey, prior to and just after game to study

willingness to pay• Preliminary results showed strong willingness• Slightly more that 30% were willing to pay at

least the fair price of IBLI; wealthier hhs willing to pay more.

• Study undertaking in 2008. Two worst drought years in past two decades in 2009, and 2011

McPeak, Chantarat, and Mude (2010, AFR)

Chantarat, Mude, and Barrett (2009)

Pastoralists seem keen and willing: How to provision?


IBLI Institutions Feasibility Study• How might IBLI complement or compete with

existing risk-management practices?• Is the current institutional and policy

environment favourable to an IBLI-type product/program.

• Efforts to understand the various network of stakeholders and institutions that would be relevant and willing

Rallying the troops• Building a coalition of partners (insurance

companies, technical partners, GoK, donors, NGOs….)

• Launch of pilot in Marsabit 2010

Matsaert, Kariuki and Mude (2011, DIP)


• To date, and increasingly so as index insurance programs proliferate, selection of program target locations has been largely opportunistic.

• As increasing resources are applied, and to increase the likelihood of sustainable scaling, it may be necessary to move toward impacts based targeting – strategic selection of program development to target areas with high likelihood of impact and demand.

• General prerequisites for index insurance product impact;• Target population vulnerable to systematic,

quantifiable and covariate risk• Risk is spatially correlated• Available (or potentially available) insurance and

delivery infrastructure

(Jensen and Barrett, 2015 Cornell Working Paper)

Africa Classification for IBLI “Relevance Zones”

(Mills et al., 2015 Cornell Working Paper)


CAPACITY DEVELOPMENT, TRAINING, EXTENSION, MARKETING

• Across the delivery chain – insurance underwriters, implementing partners, government agencies, regulators, extension and sales agents, - need to have a clear understanding of their roles, and to develop the capacities to execute them effectively

• Fundamentally, for sustainable scale, the client needs to understand the product and trust the delivery mechanism.

IBLIs CAPACITY DEVELOPMENT STRATEGY

Level 1: Knowledge and tools for government and insurance industry policy makers

Level 2: Knowledge, skills and job aids for IBLI/KLIP sales agents and promoters

Level 3: Awareness raising for potential clients


Level 1: Knowledge and tools for government and insurance industry policy makers

IBLI Contract Design Tool• Developed jointly with the WB for the

Kenya Government. Facilitates ease of contract design parameterization and historical assessment

• Automation and integration with other contract development processes (index calculation, information dissemination…) would increase efficiencies.

Calculating Agent Functionality• Supporting Celsius Pro to parameterize

KLIP contract

ELearning Platforms• For a range of learning needs

Level 2: Knowledge, skills and job aids for IBLI sales agents and KLIP promoters


Whole range of learning tools• Training of trainers manuals, quick

reference guides, sales and marketing tools

IBLI Interactive Classroom Curriculum

Web-based IBLI Curriculum (in progress)

IBLI Percentile Calculator

IBLI mobile learning application w/ gamification


• Radio talkback shows• Extension videos• Cartoons• Posters• Village barazas• Village credit and savings groups• Communications strategy review

being undertaken

Level 3: Awareness training for potential clients

1.1 Instructional design guide screen shotsEstablishing Informed Effective Demand

IBLI Interactive Classroom Curriculum (Screen Shots)

2.1 IBLI percentile calculator screen shotsEstablishing Informed Effective Demand

IBLI Percentile Calculator (Screen Shots)

Other highlightsEstablishing Informed Effective Demand

• Games / Gaming can be exciting and ‘sexy’, but unless executed properly… one can lose much of the intended and learning benefits

• Phase 2: Improve mlearning app and enhance gamification components; include complementary educational clips; test better hardware

M-LEARNING APP SCREEN SHOTS

Read more at: http://www.slideshare.net/ILRI/ilri-panel-lyons/14

• Experimental design looking at effects of tradition training, mobile training, cash incentives and gamification incentives

http://www.slideshare.net/ILRI/ilri-panel-lyons/14



Low cost, efficient, delivery mechanisms• Pastoralist rangelands offer quite a challenge for

delivery of the IBLI product (sparsely distributed populations, deficiency of provision infrastructure such mobile networks, agency outfits etc…)

• Transacting sales become very costly, even more so payment of indemnities which can create problems of trust etc.

• Developed mobile sales transactions applications with back end MIS for both APA and Takaful.

• KLIP program leveraging provision of bank accounts through HSNP program in Northern Kenya.

• Application of digital technological solutions will be critical to reducing costs and going to scale

• Sales, even on the back of digital platforms will require some agency. How to make required agent structure sustainable?

Low cost, efficient, delivery mechanismsTo reach scale:

• will need to leverage technology to reduce the cost of product administration and delivery

• Will need sufficient number of physical agents to effect sales, deliver information and extension, and build product salience.

• Effective institutional mechanism for coordinating and regulating the contract development and insurance provision system.

Policy and Institutional Infrastructure

• Sustainable, large-scale index insurance program requires a clear and well articulated policy structure

• No example of unsubsidized private market for index insurance in developing countries. Globally only 7% of transaction volume is purely private.

• Experience and evidence suggests that for programs to go to scale they need to build on strong, well-coordinated public and private sectors

• What are the key roles for each sector?


Experience tends to suggest that implementation of agricultural insurance is most efficient and effectively managed by the private

commercial agricultural sector

Product Design and Development

Product development

Pricing

Data

Collect

Audit

Finance

Outreach

Innovative distribution channels

Link to credit

Risk financing

Underwrite risk

Participation in co-insurance pool


… but that successfully scaled up agricultural insurance programs typically require leadership and targeted support from government

Data

CollectAudit

ManageFinance

Outreach

Link to social safety netsLink to credit

Premium subsidiesAwareness building

Risk Financing

Public sector reinsurance

Promote coinsurance pool

Support product design and development

Product development and pricing (short run)Technical support for

insurers (long run)

Enabling environment

Institutional framework

Legal framework

Consumer protection

Financial support

Moving toward scale

• Growing body of evidence continues to highlight the socioeconomic and risk-management value of index insurance programs, and the logic of public support.

• IBLI experience has made a contribution to this evidence, and to identifying some of the barriers to scale and trying to solve for them

• Going to scale will require careful research and development efforts to unlock the barriers, and an alignment of policy and technological forces.

• This alignment looks like it is beginning o take place in Ethiopia and appropriate stewardship of the key partners and institutions in the public and private spheres seem poised to generate real movement toward scale

For more information, visit http://ibli.ilri.org/

Thank you

Thank you for listening

THE IBLI PROGRAM IS A COLLABORATIVE EFFORT OF MANY PARTNERS

IBLI sales trends in Kenya- APA insurance company

IBLI sales trends in Kenya- Takaful insurance of Africa company

IBLI: Sales Trends- Oromia Insurance company

Sustainable Index-Based Livestock Insurance

Government & Nonprofit

Transcript of Sustainable Index-Based Livestock Insurance