UC Davis economist helps protect African herders with new livestock insurance program

University of California, Davis
November 21, 2011

Herdsmen in drought-stricken Kenya have received their first payments from an innovative livestock insurance program designed with the help of a University of California, Davis, economist.

The program, intended to prevent rural livestock producers in arid east Africa from falling into indigence and food-aid dependence, could be a model for improving food security in other areas of the world.

The recent drought in East Africa triggered the program's first payment of a total of $25,000 U.S. to 650 families who had purchased insurance for the current season.

"The project began with the idea that it may be cheaper for the public sector, including food-aid donors like the United States, to help people protect their livestock assets against drought at low cost through a partial insurance subsidy than it would be to let them lose their assets and resort to emergency assistance," said UC Davis professor Michael Carter, an agricultural and resource economist.

"Uninsured risk creates a poverty trap for villagers who depend on animals for income and a stable food supply. Big droughts in this area wipe out 50 to 60 percent of what people have."

The pilot program, the first index-based livestock insurance program for African herders, was developed by researchers at UC Davis; Cornell University; and the International Livestock Research Institute, based in Nairobi, Kenya. Commerical collaborators are the Kenya-based UAP Insurance Ltd. and Equity Bank.

Index-based insurance protects against risks shared by an entire community. In this case, the index, or statistical measure of risk, is the availability of forage based on satellite imagery. When the index predicts livestock mortality in excess of 15 percent, payment is triggered to all clients within the defined geographic area.

For example, a cattle herder who lives in an area with a livestock mortality rate of 33 percent receives a payout covering 18 percent of his or her animals. With cattle valued at about $150 per head, an insurance policy covering 10 animals would pay out at about $270.

"If a couple of families have bad luck with their animals one year, they can get help from friends or relatives," said Carter. "If everyone in the entire community loses half their herd at the same time, there is no one to lend a hand."

He and other founders of the program are hopeful that distribution of the insurance payments will bolster trust among the local people and generate more widespread awareness and interest in the livestock insurance program. One of the research team's goals is to determine how much the herders, many of whom live on less than 40 cents per day, are able and willing to pay for livestock insurance.

"That will prepare us to eventually turn to the Kenyan government and international relief agencies and offer them a proposal for a 'smart subsidy' that will achieve their goals of reducing indigence in this region in a cost-effective way," Carter said.

Financial education starts with poker chips

To explain to villagers how index-based insurance works, Carter and the research team--headed by Andrew Mude of the International Livestock Research Institute--devised a game with poker chips that represent livestock and colored balls that represent different probabilities for herd loss.

For herders with an average education of one year of schooling, the financial education game is critical to demonstrating what insurance will and will not cover.

Villagers must first sell a few animals in order to purchase insurance for the remainder of their herds, so building community trust with the research team is essential to the process.

When the index-based insurance was initially introduced in Kenya in 2010, some 2,000 families purchased a policy to cover almost 6,000 head of livestock.

"It's amazing that we were able to get so many people interested in this," said Carter. "It's because they know that risk is a dramatic part of their lives."

As drought began to affect the region in 2011, Carter and Mude devised an online color-coded map based on satellite imagery to keep people informed of pastureland conditions. Green represents good forage conditions. Yellow, orange and red indicate increasing declines in forage conditions. Black indicates that the predicted rate of livestock mortality due to poor forage has exceeded 15 percent and will trigger payment to policyholders. Index readings and color designation are posted twice a month.

"The villagers we're dealing with don't have computers or Internet, but the members of parliament do, and they're concerned about protecting the people of this remote region who are not a part of any of the major ethnic groups of Kenya," said Carter. "The color-coded map is a transparent way to keep people informed of forage conditions and when policies will pay out."

Carter and colleagues will continue to evaluate the effectiveness and impact of the livestock insurance program on poverty by monitoring factors such as household economic well-being and child health and growth in the region. They are especially interested in how the insurance works alone and in conjunction with food-aid programs to reduce the extent and depth of poverty.

Funding for the Index Based Livestock Insurance project is provided by the U.S. Agency for International Development, the European Union, the British Government, the World Bank, the Microinsurance Facility and the Global Index Insurance Facility.

For more information about the program, visit the Index Insurance Innovation Initiative at http://i4.ucdavis.edu/.

To view a video about the livestock insurance program, visit
http://blip.tv/ilri/livestock-insurance-for-pastoralists-in-kenya-3124879.

Media contact(s):

• Michael Carter, Agriculture and Resource Economics, (530) 752-4672, mrcarter@ucdavis.edu
• Robin DeRieux, College of Agricultural and Environmental Sciences, (530) 752-8244, rderieux@ucdavis.edu
• Pat Bailey, UC Davis News Service, (530) 752-9843, pjbailey@ucdavis.edu