Like anyinsurance product, index-based insurance aims to compensate clients in theevent of a loss. Unlike traditional insurance, which makes payouts based oncase-by case assessments of individual clients’ loss realisations, index-basedinsurance pays policy holders based on an external indicator that triggerspayment to all insured clients within a geographically-defined space. For indexinsurance to work, there must be a suitable indicator variable (the index) thatis highly correlated with the insured event. Using a data source that ispromptly, reliably and inexpensively available (and that cannot be manipulatedby either the insurer or the insured), an index insurance contract makes theagreed indemnity payment to insured beneficiaries whenever the data sourceindicates that the index reaches the “strike point”, or insurance activationlevel. Index-based insurance products represent a promising and excitinginnovation for managing the climate-related risks that rural agriculturalhouseholds face. In this particular case we apply this product to helppastoralist households regularly hit by droughts that erode their productiveasset base and threaten their livelihoods, to help manage the vulnerabilitiesposed by drought-related livestock losses.

Index-basedinsurance is particularly suited to cover such risks as they are largely sharedrisks, impacting a large number of the affected populations at any one time,and can be related to measures such as rainfall and average forage conditionsthat can easily be indexed. By providing compensation against livestock lossesdue to well defined drought occurrences, insurance can help stabilise assetaccumulation and enhance economic growth, credit provision for investment inproductive assets and livelihoods, and stem the downward spiral of pastoralistsinto poverty.

Scaling-up approaches

Pastoralistsand agropastoralists or anyone with livestock holdings in the coverage area isa potential user. IBLI-type products are most suited to pastoral productionsystems in arid and semi-arid lands where there is a strong relationshipbetween climactic factors and livestock productivity. Currently the product isbeing mediated by the market and we are evaluating its long-term commercialsustainability. At the same time we are investigating options for smartsubsidies provided by governments or donor institutions either to lowercommercial premiums or to target more at-risk vulnerable populations with freeor cheaper livestock insurance offered as part of a productive social safetynet programme.

Sincethe product is a new innovation offering insurance to a largely illiteratepopulation with no prior experience with insurance, a critical factor iseducation and extension. Target clients must be confident in theirunderstanding of the product in order to adopt it. There also has to be clarityon exactly what the insurance covers in order to maintain confidence.

Increasedcapacity in the insurance provision and regulatory agencies is critical. Forthe product to be successfully scaled-up, there is a need for a critical massof technicians and policy persons who understand the key aspects of theinsurance product, are able to design or make revisions to the design ofproducts, and understand the key features in the policy and regulatoryenvironment that must be attended to in order for the product to be successfuland sustainable.

Giventhe remoteness of ASALs, it will also be important to think carefully about theoptimal transactions platform. For the pilot, agents were using vehicles totraverse the districts and conduct sales manually. Trying to tap into existingdevelopments in ICT and telephony would make the process that much moreefficient.

One ofthe principle challenges is data availability. The design of a good index ispredicated on the availability of a minimum set of data that allows for themodelling of a precise relationship between the risk to be covered by theinsurance and the index variable. Another key challenge is the development ofindustry capacity to ensure careful but paced scale-up. Currently the processof product development and implementation is quite slow as the expertise isvested in a few minds. This will need to change if the product is to bemainstreamed.

Recommendations on addressing thechallenges

For thechallenge on data availability, we shall impress on the relevant bodies theneed for improved collection and storage of the necessary data. Currently,however, we are working on developing statistical techniques to use variousdisparate data sets and the trends and relationships therein to extrapolatecomplete data sets upon which indices can be reliably built.

We alsorecommend the development of a manual on the research, development,implementation process and key lessons or issues to consider in scaling-up, aswell as various educational modules targeted at the various key stakeholders inthe industry.

Key lessons learnt

§  Prior to the implementation of the pilotthere was a comprehensive research effort that targeted both the potentialclientele as well as key community-based and industry stakeholders. It wascritical as it gave a measure of confidence that this was indeed a product thatwas considered to add value as it was in demand and allowed us to tweak key featuresof the contract, where possible, to the client’s specification.

§  We also learned from the launch that theproduct was better received where there was a concerted effort by extensionagents and where these extension agents were recruited in direct consultationwith community members. Ensuring that influential and locally respected personswhere trained and furnished with sufficient information on the product was alsokey.

§  The delivery channel is critical. Wewere not able to meet demand because roving agents were unable to cover allnecessary bases. Having stationary agents in key areas, preferably using anelectronic platform, would be beneficial. This is under design.

One keygender concern was that as most pastoralist herds in Marsabit are owned by men,women may not benefit as much. However, we were surprised to find that 48% ofthe contracts were bought by women. Through our impact assessment efforts (weconducted a baseline of over 900 households across Marsabit that we shall berevisiting annually for the next four years) we shall be able to investigatethe gender based differentials in adoption and impact. In addition, we have aseparate specific module to help us understand what drove a relatively high andunexpected demand by women.

We havea comprehensive website complete with product summaries, academic papers, mediareports, a regularly updated index status as well as description of index,contact information and more. Please visit at www.ilri.org/ibli/.