Designing Index Based Livestock Insurance for Managing Asset Risk in Northern Kenya

Abstract:     
This paper describes a novel index-based 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 area-average livestock mortality, Established statistically using longitudinal observations of household-level herd mortality fit to remotely sensed vegetation data. Household-level performance analysis based on simulated data finds that IBLI removes 25-40% of total livestock mortality risk. We describe the contract pricing and the potential risk exposure of the underwriter to establish IBLI’s reinsurability on international markets.

Keywords: Drought risk management, index insurance, Kenya, livestock insurance, livestock mortality, NDVI, pastoralists, remote sensing, vegetation index, weather derivatives

Accepted Paper Series