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Designing Index Based Livestock Insurance for Managing Asset Risk in Northern Kenya

Published by:
Publication date
Number of Pages
Type of Publication:
Focus Region:
Sub-Saharan Africa
Focus Topic:
Climate / Weather / Environment
Type of Risk:
Weather & Climate related
Type of Risk Managment Option:
Risk transfer
Sommarat Chantarat, Andrew G. Mude, Christopher B. Barrett, Michael R. Carter
USAID, BASIS, University of Wisconsin-Madison

This paper describes a novel index-based livestock insurance product now being piloted for pastoralists in the arid and semi-arid lands of northern Kenya, where insurance markets are effectively absent and uninsured risk exposure is a main cause of poverty. We describe in detail the methodology used to design the contract and its underlying index of predicted area-average livestock mortality. The underlying statistical model uses longitudinal observations of household-level herd mortality, fit to high quality, objectively verifiable, remotely sensed vegetation data not manipulable by either party to the contract and available at low cost and in near-real time. The resulting index performs very well out of sample, both when tested against other complementing household-level herd mortality data from the same region and period and when compared qualitatively with community level drought experiences over the past 27 years. Household-level performance analysis based on simulated data also reviews that IBLI is most effective in protecting household from catastrophic covariate risks, currently uninsurable by existing means. We describe contract pricing and the potential risk exposure of the underwriter and establish that IBLI should be readily reinsurable on international markets. Finally, implementation opportunities and challenges are discussed.