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

Abstract

This article 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 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.