Index-based livestock insurance (IBLI) at the macro and meso levels to mitigate drought risks to Sudanese pastoralists
Pastoralism is a nomadic lifestyle and livelihood system centered on raising livestock. It is a lifestyle that has adapted over millennia to the harsh climatic conditions and erratic rainfall patterns of East Africa’s drylands. However, the reliance of pastoralists on seasonal rainfall and pastures leaves them extremely vulnerable to drought.
In Sudan, climate change is expected to have a strong negative impact on livestock production in pastoralist areas. The expected increase in temperatures coupled with unpredictability in rainfall patterns will decrease the availability of water and pasture, raising the risk of animal mortality and herd losses. Such losses can have a devastating impact on the livelihoods and food security of a large part of the population, as well as having a significant impact on the larger economy, for which livestock represent a major component of GDP.
To mitigate the risks drought poses to Sudan’s pastoralists and livestock sector, I propose an index-based livestock product at two levels: 1) Macro-level insurance as a government funded social safety net aimed at poorer herders that covers catastrophic losses, and 2) A meso-level insurance product sold through private insurers and lenders aimed at wealthier pastoralists and livestock traders.
In terms of the technical aspects of contract design, this insurance product would be similar to IBLI products in Kenya and Ethiopia, which are based on a remotely sensed NDVI (“greenness” index) and trigger a payout when the vegetation in a given area falls below a certain threshold (e.g. 15% of historic average for a given season).
What actions do you propose?
To mitigate the risks drought poses to Sudan’s pastoralists and livestock sector, I propose exploring the possibility of introducing index-based livestock insurance at two levels:
1) Macro-level insurance as a government funded social safety net aimed mainly at poorer herders who are at risk of falling into poverty traps and covering catastrophic losses for all livestock producers. This insurance could be partially funded from the significant taxes collected from pastoralists at the local level, and provides cash transfers to help smooth consumption in times of drought, and help recovery through restocking.
2) A meso-level insurance product that is market-based aimed at lenders, wealthier pastoralists and herders with large herds and providing greater coverage. This product could be bundled with credit, financial and extension services provided to livestock owners.
Since no such product currently exists, my actions are limited to the initial stages of understanding the market, building the institutional framework within the government to support a safety net based on insurance, and supporting insurers in developing the product.
Action 1: Support government in building the institutional framework to provide an insurance-based social safety net. This includes putting in place an administrative mechanism for identifying beneficiaries, delivering payouts, and systems for monitoring, evaluation, accountability and learning. Much support is also required in identifying options for financing, subsidization and securing reinsurance.
Action 2: Conduct a feasibility study to understand whether demand exists for market-based meso-level insurance product through focus group discussions, surveys, and consultations with experts on insurance and livestock value chains.
Action 3: Set up a formal bid process for insurance companies and other financial institutions who are interested in providing a market-based insurance product.
Action 4: Provide insurance companies with technical support on setting index distribution, developing products and contracts and advice on reinsurance from experts with experience in other IBLI projects.
Who will take these actions?
Government: Leading the process and developing the institutional framework for an insurance-based social safety net as well as support private sector in developing market-based insurance.
Private sector insurers and banks: Working with government, and through the support of international expert, conduct a study to understand market needs. Develop insurance contract and identify appropriate marketing and bundling strategies.
INGOs and donors: Providing technical support in setting up the institutional framework, developing the products and help with financing and securing reinsurance through regional risk pools or global capital markets.
Where will these actions be taken?
What are other key benefits?
The benefits of this proposed action is that it has the potential to insure pastoralists, a group who represent at least 10% of population and are particular vulnerable to climate shocks, against loss of livelihood and productive assets. Currently, there are no formal social safety nets targeted at this group of people. This safety net can provide cash transfers to help smooth consumption and reduce negative coping practices in times of stress, or as part of a program that allows herders to restock following droughts.
The risk layering strategy of the proposal (catastrophic losses covered by government while smaller losses are covered by the private sector) has been used in Mongolia, and has been shown to reduce the cost of insurance premiums for private insurance because the government covers losses associated with catastrophic losses. Providing insurance at the meso-level reduces basis risk while bundling with other services increases uptake as well as the benefit from insurance.
What are the proposal’s costs?
Potential negative side effects: The main concern or weakness of using insurance is the large opportunity cost of the premiums and the potential for insurance to encourage maladaptive practices.
Over the short term:
0—1 years: market and feasibility studies to understand demand, and the ability and willingness of insurance companies and other financial institutions to provide such a product and engage with it.
1—5 years: developing the insurance product, setting the index distribution and designing the contract with the technical support of academics and experts who have been involved in other index insurance projects in East Africa. Securing reinsurance on international or regional markets (e.g. African Risk Capacity).
5—15 years: Starting with pilots in select regions and eventually scaling up to include all regions in Sudan.
The following three proposals are similar to this proposal in that they present a model for using index-based agricultural insurance (some also specifically IBLI) to mitigate climate risks to African smallholders.
WIN-WIN-WIN: in-kind assistance, livestock insurance and credit in Rwanda / Bavagnoli, M. and Van 't Wout, T.
Agricultural insurances against floods in plantain producing communities / Miguel Montenegro
Government-Pastoral partnership to establish climate risk insurance scheme / Wassie Haile Woldeyohannes
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Photo credit for the background of first image: "Herders at the camel market" by David Stanley - Creative Commons License