Designing index based livestock insurance for managing asset risk in northern Kenya

Sommarat Chantarat, Andrew Mude, Christopher Barrett, Michael Carter. (15/3/2013). Designing index based livestock insurance for managing asset risk in northern Kenya. Journal of Risk and Insurance, 80(1), pp. 205-237.

Abstract

This article describes a novel indexbased livestock insurance (IBLI) product piloted among pastoralists in Northern Kenya, where insurance markets are effectively absent and uninsured risk exposure is a main cause of poverty. We describe the methodology used to design the contract and its underlying index of predicted areaaverage livestock mortality, established statistically using longitudinal observations of householdlevel herd mortality fit to remotely sensed vegetation data. Householdlevel performance analysis based on simulations finds that IBLI removes 25–40 percent of total livestock mortality risk. We describe the contract pricing and the risk exposures of the underwriter to establish IBLI's reinsurability on international markets.