97451 Index-based Livestock Insurance in Mongolia Protecting Herders from Climate-related Livestock Mortality Background Highlights Semi-nomadic herders make up approximately 30% of  Livestock in Mongolia are exposed to extreme the population of Mongolia. Mongolian herders raise climatic conditions. horses, camels, goats, cattle, and sheep for milk, cashmere, meat, and other products. Approximately  Herders purchase policies from private insurance one-third of this population is poor, with a further 40% companies that pay out when local livestock vulnerable to poverty, a situation significantly linked to mortality rates exceed specified “trigger” high exposure to extreme climatic conditions that can percentages. cause high rates of livestock mortality. For example,  The product is currently reinsured on the from 1999 to 2002, a combination of droughts and international reinsurance markets. severe winters caused the loss of 11 million heads of  The GoM also acts as a reinsurer and covers extreme livestock, almost 35% of total livestock in Mongolia. losses. These losses significantly negatively impacted GDP and stunted Mongolia’s economic growth. In this context, the Government of Mongolia (GoM) approached the social transfers for catastrophic losses. Herders bear World Bank and donors for assistance in developing an the cost of small losses (less than 6% livestock mortality improved risk management framework, including rate) that do not affect the viability of their business. livestock insurance. Larger losses are transferred to the private insurance industry. The final layer of catastrophic loss is borne by The World Bank helped GoM set up a public-private the GoM. partnership with domestic insurance companies to Herders purchase policies from private insurance offer affordable and cost-effective insurance coverage to herders, while protecting domestic insurers against companies that pay out when local mortality rates exceed specified “trigger” percentages up to a major losses that could jeopardize their business. maximum exhaustion point. Participation is voluntary. Objectives Losses between 6-30% are covered through a reserve fund, the Livestock Insurance Indemnity Pool (LIIP), The objectives of the livestock insurance program are established under the Ministry of Finance to guarantee to: indemnity payments, for which GoM acts as reinsurer.  Reduce the impact of livestock mortality on herders’ Losses exceeding 30% are covered by GoM. The GoM livelihoods by developing structured plans to finance also has access to a contingent credit line from the large losses before they occur; World Bank, which it can call if the LIIP is exhausted.  Provide herder households with immediate liquidity Outcome after a disaster; The 2009-2010 season resulted in the largest payments  Provide the GoM with a tool to transfer part of its (totaling in excess of US$1.3 million) thus far after fiscal exposure to climatic risks to the international nearly 22% (9.7 million) of the country’s livestock died reinsurance market. due to a harsh winter, the worst losses ever recorded. The LIIP fund was exhausted, and approximately 84% of Operating Structure losses were paid from the contingent credit provided The Index-based Livestock Insurance Project (IBLIP) in by the World Bank. For the 2010-2011 season, Mongolia, launched in 2005, is based on an index of coverage was extended to nine provinces and was livestock mortality rates by species and sum (county) purchased by around 7,000 herders. About 1,350 compiled and maintained by the Mongolian National herders received indemnity payments totaling nearly Statistics Office. The conceptual framework combines US$900,000. By 2012, it is expected that the insurance self-insurance, commercial insurance (IBLIP), and will be available in all 21 provinces. The expansion of the program at the national level will Glossary ideally involve increased risk transfer to the Index-based insurance: Index-based insurance makes international reinsurance market. Currently, a indemnity payments based not on an assessment of reinsurance treaty between participating insurance the policyholder’s individual loss, but rather on companies and French reinsurer SCOR is in place. measures of a parametric index that is assumed to Future risk transfer out of the country enhances proxy actual losses. Mongolia’s capacity to protect herders against losses while ensuring the long-term viability of the program. Indemnity: The amount payable by the insurer to the insured in the event of an insured loss. Lessons Learned 1. The development of an effective agricultural Insurance pool: An insurance pool is a collective pool insurance program requires a strong institutional and of assets from multiple insurance companies. Pooling legal framework. The legal framework should create facilitates the development of insurance markets by an enabling environment for the development of spreading risk across insurers who would otherwise private agricultural insurance and provide incentives lack financial capacity to participate in the market. It for farmers/herders to purchase insurance. enables insurers to provide coverage for high-risk events. 2. The government plays a crucial role in the public private partnership. Governments should promote a Further Reading cost-effective risk layering of agricultural production Mahul, O., & Skees, J. (2007). Managing Agricultural risks, in which small and recurrent risks are retained by Risk at the Country Level: The Case of Index-Based farmers, less frequent but more severe losses are Livestock Insurance in Mongolia. World Bank Policy transferred to the domestic insurance industry, and Research Working Papers. catastrophic losses are transferred to the international reinsurance market, possibly backed by governments. Index Based Livestock Insurance Mongolia: www.iblip.mn 3. An efficient data management system is important to the development of insurance products. A historic Contact database is needed to implement index-based Andrew Goodland, Senior Agriculture Economist, The insurance mechanisms. For livestock insurance based World Bank, agoodland@worldbank.org, +86(10) on a mortality index, this database should include 5788-7685 annual data by species as well as adult mortality data. Also, mechanisms have to be in place to secure data Olivier Mahul, Disaster Risk Financing and Insurance measurements from fraud and abuse. Program Coordinator, The World Bank, omahul@worldbank.org, +1( 202) 458-8955 4. Education and outreach is essential. Countries that do not have a culture of insurance, such as Mongolia, require extensive educational initiatives to establish successful micro-level insurance programs. When the population has little to no understanding of insurance, there may be resistance to purchase insurance. Direct marketing and educational outreach in Mongolia helped to quell this issue during the pilot phases, but the program’s expansion to a national scale will require increased efforts. www.gfdrr.org/drfi Updated September 2011 GFDRR is able to help developing countries reduce their vulnerability to natural disasters and adapt to climate change, thanks to the continued support of its partners: ACP Secretariat, Australia, Bangladesh, Belgium, Brazil, Canada, Colombia, China, Denmark, Egypt, European Union, Finland, France, Germany, Haiti, India, Ireland, Italy, Japan, Luxembourg, Malawi, Mexico, The Netherlands, New Zealand, Norway, Portugal, Saudi Arabia, Senegal, Spain, South Africa, South Korea, Sweden, Switzerland, Turkey, United Kingdom, United States, Vietnam, Yemen, IFRC, UNDP, UN/International Strategy for Disaster Reduction, and The World Bank.