IndexBasedLivestockInsuranceProtec4ngVulnerablePastoralistsfromDrought-relatedShocks

UR2016Geneva,May20thPanel:HowRisksandShocksImpactPoverty,andWhy,When,andWhereCanBeOerFinancialProtec4onHelp

AndrewMude,PrincipalEconomistandIBLIProgramLeader,Interna4onalLivestockResearchIns4tute

IBLI:Coversdrought-relatedmortalityandmorbidityrisksforpastoralistlivestock

Mo4va4on:TargetPopula4onandEvents

•  ASIZEABLECONSTITUENT•  Over50millionpastoralistsinSub-Saharan

Africa:over20millionintheHornofAfrica

•  THECENTRALITYOFLIVESTOCK•  InnorthernKenyaandSouthernEthiopia:-Livestockproductsandsalesoflivestockare40%ofincomeforaveragehousehold

•  VULNERABILITYTOLIVESTOCKLOSSES•  CatastrophicherdlossduetodroughtidenEfiedasthemajorsourceofvulnerabilityandcauseofpoverty

•  Between2008and2011KenyaneconomysufferedUS$12.1billionindamagesduetodrought,over70%duetolivestocklosses.

Mo4va4on:PovertyTrapsandCatastrophicRisk

Thereisstrongevidenceofpovertytrapsinthearidandsemi-aridlands(ASAL)ofnorthernKenyaandsouthernEthiopia.Theseputapremiumonriskmgmt.Catastrophicherdlossriskduetomajordroughtsiden4fiedasthemajorcauseofthesedynamics.

Source:Lybbertetal.(2004EJ)onBoranpastoralistsins.Ethiopia.SeealsoBarreWetal.(2006JDS)amongn.Kenyanpastoralists,Santos&BarreW(2011JDE)ons.EthiopianBoran.

Mo4va4on:IncreasedRiskFromClimateChange

Pastoralistsystemsadaptedtoclimateregime.Butresilienttoashi[inclimate?Manymodelspredictincreasedrainfallvariability(i.e.,increasedriskofdrought).

Herddynamicsdifferb/ngoodandpoorrainfallstates,andsochangewithdrought(<250mm/year)risk.Key:Inso.Ethiopia,doublingdroughtriskwouldleadtosystemcollapseinexpecta@onintheabsenceofanychangetoprevailingherddynamics.

Source:BarreWandSantos(EcolEcon2014)

Mo4va4on:StandardResponsesToDrought

STANDARDRESPONSESTODROUGHTARECOSTLY&INSUFFICIENT•  Destocking/Restocking–slow,expensive,targeEngchallenges,inefficiency•  Foodaid–slow,expensive,targeEngchallenges,fosterdependency•  Cashaid–targeEngchallenges,fiscalsustainability,notequallyeffecEveforall.•  HSNPPlus–Needtosupplementtoprovisionofwelltargetedcashtransferstothepoor,withproducEvesafetyneedsinthefromoflivestockinsurancetominimizeslideintopovertyresulEngfordroughtshocks.ParEcularlyinpastoralsystemswherepovertytrapdynamicsenhancethisproblem.

LivestockInsuranceasacomplement

Sustainableinsurancecan:•  PreventdownwardslideofvulnerablepopulaEons•  Allowsfocushumanitarianresourcesontheneedy•  Crowd-ininvestmentandaccumulaEonbythepoor

ButcaninsurancebesustainablyofferedintheASAL?Conven4onalinsuranceunlikelytoworkinpastoralcontext.

INDEX-BASEDLIVESTOCKINSURANCEprogramlaunchedinNorthernKenya(Jan2010)andS.Ethiopia(July2012).

•  Comprehensiveprogram–contractdesign,impactassessment,marketandcapacitydevelopment,policysupport….

•  ProgramscalinginbothKenyaandEthiopiaspearheadedbyprivate/publicarrangements.

Inthistalk,willfocusonresearchevidenceaboutIBLIimpactsonarangeofsocioeconomicvariables.

•  IBLIsurveylaunchedinMarsabit,KenyainOct2009andinBorana,Ethiopia,Mar2012bothbeforetherespec4velaunchofIBLIsales

•  Marsabitsurvey:925householdsover16loca4ons–currently5roundsofpaneldata•  Boranasurvey:515householdsover17kebeles–currently4roundsofpaneldata

IBLIPilots,andresearchdesign,inEthiopiaandKenya

IBLIImpacts:Herdmortalityrisk

Propor4onofhouseholdsforwhomIBLIimprovestheirposi4onwithrespectto

eachsta4s4c

Jensen,BarreW&Mude2014

Sta4s4c Propor4on Loaded&

UnsubsidizedSubsidized

Mean 0.232 1.000Variance 0.359 0.359Skewness 0.817 0.817Semi-Variance

0.374 0.609

•  Evenatunsubsidizedpremiums(40%loading)purchasingIBLIincreasesherdsurvivalratesbyconsiderablyreducingriskofcatastrophicloss.

•  MajorityofhouseholdsarebeWeroff(reducEonsinherdlosses)purchasingIBLIcoveragethanotherwise

IBLIImpacts:Livestockproduc4vity/income

IBLIcoverage:• Increasesinvestmentsinmaintaininglivestockthroughvetexpenditures• IncreasestotalandperTLUincomefrommilk.

• Reducesherdsize(consistentwithprecauEonarysavingshypothesis)

Note:TLUveterinaryexpendituresarepos/signrelatedtomilkproducEvity

Jensen,BarreW&Mude2014

IBLI

DependentVariable CumulaEvePast

Coverage CurrentCoverage

(TLU) ProducEonstrategies:

HerdSize -5.634*** -0.270 (1.970) (0.693) [3.543] VeterinaryExpenditures(KSH)

584.8* -46.21 (324.7) (127.2)

[15.17] HouseholdisParEallyorFullyMobile

-0.0669 0.0386(0.111) (0.0481)

[14.86]ProducEonoutcomes:

Milkincome(KSH) 1,688* 840.6* (970.0) (473.6) [11.46] MilkincomeperTLU(KSH)

423.5*** 63.81 (118.1) (47.23)

[13.05] A complete list of covariates, coefficient esEmates, and modelstaEsEcscanbefound inJensen,Mude&BarreW(2014).Clusteredandrobuststandarderrorsinparentheses.ModelF-statinbrackets.***p<0.01,**p<0.05,*p<0.1.

IBLIImpacts:Welfare

•  IBLIimprovespost-droughtcoping.A[ercatastrophic2011drought,IBLIcoveredhouseholdsreportedbeWerexpectedbehaviours/outcomes

•  36%reduc4oninlikelihoodofdistresslivestocksales,especially(64%)amongmodestlybeWer-offHHs(>8.4TLU)

•  25%reduc4oninlikelihoodofreducingmealsasacopingstrategy,especially(43%)amongthosewithsmallornoherds

•  IBLIshowntohaveaposi4veimpactonimprovementstomid-upperarmcircumference(MUAC),astrongpredictorofchildmalnutri4on

•  IBLIhouseholdsalsopostgreaterhouseholdincomeperadultequivalent

•  InEthiopianopayment(preNovember2014).Inprincipalinsuranceshouldbebeneficialevenwithoutpayingout(a“pieceofmind”effect).•  OurEthiopiasurveycollectsmeasuresofsubjec4vewell-beingtogaugeoveralllifesaEsfacEon.

•  IBLIhasaposiEve,statsigeffectonHHwell-being,evena[erpremiumpaymentandw/oanyindemnitypayments

Hirfrot,BarreW,LentzandTaddesse2014;JanzenandCarter2013NBER

IBLI:Acost-effec4vesocialprotec4ontool

•  PosiEveIBLIimpactsdonotnecessaryjusEfyinvesEngscarcedevelopmentorsocialprotecEonfundsinIBLI.

•  Needtounderstandtheopportunitycostvis-à-viscomparaEveintervenEons:HSNP

•  ResearchdesignresulEnginstrategicallyoverlappingIBLIandHSNPunits,andEmingofprovisionallowsforcomparaEveevaluaEon.

•  RESULTS:•  BothIBLIcoverageandHSNPparEcipaEonincreasehouseholdincomefrommilk,incomeperAE,andMid-UpperArmCircumference(MUAC)ofchildren.

•  Fromatotalcostpointofview,HSNPandIBLIaresimilarintermsofimpact.•  FrommarginalcostperspecEve(moreimportantforscalingout),IBLIconsiderablymorecosteffecEvethanHSNP–  NotethatthisreferstoIBLIproductwhereclientpaysfullriskpremiumplusloadingof40%

Jensen,BarreW&Mude2014

Insurancevs.cashtransfers:Normalizedbycost

IBLIgeneratescomparableimpact/KShonaverageatpilotscale.Butphilanthropic/publicfundingislargelyfixedcost,sothemarginalbenefit/costra4osare>anorderofmagnitudelarger!

Allinreal2009KenyaShillings.ImpactsareesEmatedusingtheaverageclientvalueandcostsfromadministraEverecords,andparameteresEmates.1ResultsaremulEpliedby10.2ResultsaremulEpliedby1,000.

Income from Milk Income per AE MUAC Cost structure Cost/

Participant Impact Impact/

Cost Impact Impact/

Cost1 Impact Impact/

Cost2

Total Program Cost/Participant

HSNP 47,600 992 0.021 394 0.083 1.097 0.022 IBLI 37,600 2,631 0.067 263 0.070 0.337 0.026

Marginal Cost of an Additional Participant

HSNP 31,700 992 0.031 394 0.124 1.097 0.033 IBLI 1,580 2,631 1.667 263 1.666 0.337 0.623

Jensen,BarreW&Mude2014

Forrelatedinforma4on,visitibli.ilri.org/

ThankyouIBLIclearlyhasarangeoffavorableimpactsonpurchasersandcanbeshown–insomeinstances–tobemorecosteffec4vethancashtransfers.IBLIcanbeseenasapromisingop4onforaddressingcatastrophicdroughtrisk,mi4ga4ngagainstshock-relateddescentintopovertyandpromo4ngascentThankyoufor4me,interestandcomments.

IBLIUptakeSignificant…ButSoIsDisadop4on

MarsbitsurveyrespondentsuptakepaWerns(n=832)

Saleswindow New1Replace-ment2

Augment-ing3

Hold-ing4 Reenter5 Lapsed6 Total7

J-F2010 233 0 0 0 0 0 233

J-F2011 65 62 0 0 0 171 298

A-S2011 65 0 31 96 22 149 363

A-S2012 19 25 0 0 33 305 3821FirstEmepurchasers.2Replacedapolicyabouttoexpire.3PurchasedaddiEonalcoveragethatoverlappedwithexisEngcoverage.4NopurchasebuthadexisEngcoverage.5Letpolicylapseforatleastoneseasonbutpurchasedthisseason.6PastpolicieshavelapsedanddidnotpurchasedaddiEonalcoverage.7Totalnumberofhouseholdsthathavepurchasedtodate.

KeydeterminantsofIBLIuptake

Generaluptakefindings—robustacrossspecifica4onsandsurveysPrice:Responsivetopremiumrate(priceinelasEc).PriceelasEcitygrowsw/designrisk.DesignRisk:Designerrorreducesuptake;greatereffectathigherpremiumrates.Idiosyncra4cRisk:HhunderstandingofIBLIincreaseseffectofidiosyncraEcriskUnderstanding:Extension/markeEngimprovesaccuracyofIBLIknowledgebutno

independenteffectofimprovedunderstandingonuptake.Herdsize:LikelihoodofuptakeincreasinginHHherdsizeLiquidity:IBLIpurchaseincreasingw/HSNPparEcipaEonandHHsavingsIntertemporalAdverseSelec4on:HHsbuylesswhenexpecEnggoodcondiEons.Spa4alAdverseSelec4on:HHsindivisionswithcovariateriskaremorelikelyto

purchaseandwithgreatercoverage(spaEaladverseselecEon).Gender:nogenderdiffinuptake.WomenmoresensiEvetoriskofnewproduct.

Bageant2014;Jensen,Mude&BarreW2014;Takahashietal.2014

Covariateriskisimportantbuthouseholdlossesvaryalot…

andtheindexdoesnotperfectlytrackcovariatelosses.

-  Onlysuchstudyofindex-insuranceproductsthatweknowoff.Crucialforassessingvalueandprecisionofthecontract.

Jensen,BarreW&Mude2014

IBLIMarsabitContract:AnImperfectProduct