Index insurance for agriculture in Addis Ababa, Ethiopia, 9 December 2010

Design and Development of IBLI for Southern Ethiopia

Andrew G. Mude International Livestock Research Institute

Outline Developing IBLI Ethiopia Research Agenda

Ø Objective – To discover the viability and poverty reduction impacts of index-insurance and establish whether, how and when these impacts can be realized and sustained

Ø Key Steps

• Design a livelihood-focused IBLI • Identify suitable contract structure • Identify suitable delivery mechanisms • Address impacts of climate change and induce climate change adaptation Existing Data Longitudinal household data

Ø PARIMA (2000-02) Borana and Guji Zones

Note on Studied Sites: • Quarterly household PARIMA’s Kebele BORE Desta’s Town Center survey (30 hhs/kebele) ADOLANA • 5 kebeles in 4 woredas

HAGERE MARYAM ODO Negele Ø Desta (1999)’s Herd Finchawa Qorate LIBEN Recalls Data

TELTELE YEBELO Dida Hara (1981-97) Wachille

ARERO • Annual household MOYALE Mega herd recalls (~15 hhs/ KENYA center) Moyale • 35-km radius of 4 town centers Existing Data Longitudinal household data Ø Livestock Mortality rate (%) 8

7 Livestock Mortality experienced in PARIMA (2000-02) PARIMA (2000-02) 50% 6 Drought 40% 5 Dida Hara Disease 30% Dillo CCPP 20% 4 Finchara Predator Snake bite 10% Qorate 3 Accident 0% Livestock loss (TLU) per household Wachille Aging LR2000 LD2000 SR2000 SD2001 LR2001 LD2001 SR2001 SD2002 LR20022 Others

1

0 LR 2000 LD 2000 SR 2000 SD 2001 LR 2001 LD 2001 SR 2001 SD 2002 LR 2002 50% Livestock Mortality Recalls in Desta's Data (1981-1997) 40%

30% Yabello Mega 20% Negele 10% Arero

0% 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Existing Data NDVI and Livestock Mortality Satellite imagery NDVI (8km resolution, available every 10 days in real-time)

Gelana Abaya Bore Bore Gelana Abaya Bore Gelana Abaya Uraga Uraga Adolana Wadera Uraga Adolana Wadera Adolana Wadera

HegermariamOdo Shakiso HegermariamOdo Shakiso HegermariamOdo Shakiso

Liben Liben Liben Yabelo Yabelo Yabelo Telt ele Telt ele Telt ele Arero Arero Arero

Moyale Moyale Moyale Dire Dire Dire

Drought 2000 Drought 2009 Good forage condition 2010 Standardized NDVI 4 3 2 1 0 -1 -2 -3

Drought 84-85 Drought 90-91 Drought 99-00 Drought 05-06 Drought 09 50%

40% Key Questions: 30% 20% 10% 1. Other longitude household-level data? Verification of past data? 0% 2. TheArea need livestock to collect loss (%) recent (Recalls herd from recalls? Desta 1981-97, PARIMA 1998-2002) Scoping Mission (2010)

Ø Objectives 1. To introduce IBLI to local communities/authorities 2. FGD to learn the local opinions on IBLI

3. To meet with local authorities,

financial institutions, NGOs Ø Key discussions 1. Contract design (Group-based, ex-ante payout) 2. Delivery mechanism 3. Climate change Contract design/delivery/regulation Group-based IBLI

Financial Institution Financial Institution Financial Institution

G G

i i i i i i i i i Individual IBLI Group as delivery channel Group as client + Substitute for absence financial facilities in remote locations + Use group learning to enhance education and extension + Use group rules to reduce individual basis risks + Enhance prospect for linking credit access with insurance -- Groups need to be well-established, participated by pastoralists Contract design/regulatory Ex ante/ Ex post payout Start of the contract Observed loss

Ex-ante payout Ex-post payout for asset protection for asset replacement

IBLI payment to insured to IBLI payment to insured to protect animals before drought replace animals after drought

+ Could be cheaper to protect + Higher accuracy in predicting animals than to replace them livestock mortality - Rely on accuracy in predicting - May be more expensive to livestock mortality ex-ante replace animals

Potential Key Questions:use: • Supplementary1. Which product feed could and water provide more effective risk management? • Hired transport to access market 2. What are regulatory pre-requisites of ex-ante product? Contract design/regulatory Risk Layering

à Reducing risk coverage for commercial insurers for lower premiums

à Cap commercial provision of risk to an intermediate risk layer.

à Catastrophic zone can be explicitly taken up by government or donors who already offer some response in times of catastrophic loss Climate change adaptation/mitigation Ø Climate change à more/worse droughts à IBLI more expensive … mitigation to limit premium rise, adaptation to cushion against premium rise? NDVI Trend in Dida Hara (1981-2010) 0.70 y = -6E-05x*** + 0.321 Ø Evidence of change in NDVI 0.60 0.50 à Climate change? 0.40 0.30 0.20 0.10 0.00 1981 1982 1983 1985 1986 1987 1988 1990 1991 1992 1993 1994 1996 1997 1998 1999 2001 2002 2003 2004 2005 2007 2008 2009 Ø Incorporating Climate Change in IBLI modeling and delivery: Ø Feeding climate change predictions into IBLI response functions and pricing in expected climate change Ø Conditional Insurance Transfers

Impact Evaluation

• Follow a similar impact evaluation strategy as in Marsabit:

• Baseline of 920 households with 3 annual repeats • Should allow us to rigorously establish impacts directly attributable to IBLI • Discount coupons and educational games to encourage uptake • Also plan for qualitative surveys to generally establish perspective of target clientele.

Thank you

For more information please visit: www.ilri.org/ibli/