Managing agricultural risk at the country level: The case of index-based livestock insurance in Mongolia

Publication´s abstract

The document describes the index-based livestock insurance programme in Mongolia designed in the context of a World Bank lending operation with the government of Mongolia. It provides details of the insurance scheme, a combination of self-insurance by herders, market-based insurance and social insurance, and explains the syndicate-pooling arrangement protecting participating insurance companies against excessive insured losses.

The paper discusses the following topics:

• Country risk management approach (ex-post funding, country agricultural risk management model, public-private partnerships)
• Livestock mortality in Mongolia
• Design of a new livestock insurance approach (index-based livestock insurance, layering of livestock risk, livestock insurance indemnity pool, government fiscal exposure)
• Pilot study
• Challenges of the pilot project (statistics used to measure livestock mortality, basis risk for individual herders, lack of education and knowledge about index insurance among herders, potential for fraud in the countryside)
• Experience to date

Text boxes provide information about existing schemes:

• FONDOS in Mexico
• Turkish catastrophe insurance pool

The conclusions can be summarised as follows:

• Herder participation in the index-based livestock insurance pilot project was better than expected.
• The types of issues raised in the feedback sessions highlight the need for very thorough and clear education of stakeholders. Herders must have a clear understanding about the terms of the BIP and DRP contracts and how the insurance works to ensure their trust in the programme, insurance companies and confidence in the calculation of indemnities.
• Linking insurance to loans is beneficial for both banks and herders. Three major lenders agreed to lower interest rates and, in some cases, to loan more for herders purchasing the BIP insurance.
• On average, herders with a smaller-than-average herd size were the primary purchasers of the insurance products.
• Most herders purchased the lowest level of coverage (30% of the value of their animals)
• Despite the significant educational efforts undertaken, past negative experience where livestock insurance did not pay for losses during the most difficult times negatively affects decisions of herders to buy the insurance cover.