Sommarat Chantarat

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

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 IBLIs reinsurability on international markets.

Poverty Traps and Climate Risk: Limitations and Opportunities of Index-Based Risk Financing

The objective of this paper is to frame the key issues and summarize the current state of knowledge about and innovations in index-based risk transfer products (IBRTPs) as they relate to the management of climate risk for poverty reduction, especially of chronic or persistent poverty. In the past several years, interest in and experimentation with weather index insurance and other IBRTPs has grown rapidly. Though no one should expect that these innovations alone can solve the problem of chronic poverty, index-based financing opens up a range of intriguing possibilities. The remainder of this paper is comprised of five major sections that discuss: 1) how weather risks and climate shocks impact the poor in developing countries; 2) the concept of poverty traps, highlighting how conventional risk management strategies typically do not work well for managing covariate weather risk; 3) the limitations and opportunities of financial innovations using index-based risk transfer products (IBRTPs) for reducing or transferring weather risks and climate shocks; 4) a poverty traps-based typology of IBRTPs; 5) key remaining challenges in developing and implementing index-based risk financing for use in the global struggle to end chronic poverty.

Dynamic Field Experiments in Development Economics: Risk Valuation in Morocco, Kenya and Peru

The effective design and implementation of interventions that reduce vulnerability and poverty require a solid understanding of underlying poverty dynamics and associated behavioral responses. Stochastic and dynamic benefit streams can make it difficult for the poor to learn the value of such interventions to them. We explore how dynamic field experiments can help (i) intended beneficiaries to learn and understand these complicated benefit streams, and (ii) researchers to better understand how the poor respond to risk when faced with nonlinear welfare dynamics. We discuss and analyze dynamic risk valuation experiments in Morocco, Peru, and Kenya.

Improving Humanitarian Response to Slow-Onset Disasters Using Famine Indexed Weather Derivatives

This paper illustrates how weather derivatives indexed to forecasts of famine can be designed and used by operational agencies and donors to facilitate timely and reliable financing, for effective emergency response to climate‐based, slow‐onset disasters such as drought. We provide a general framework for derivative contracts, especially in the context of index insurance and famine catastrophe bond, and show how they can be used to complement existing tools and facilities in drought risk financing through a risk‐layering strategy. We use the case of arid lands of northern Kenya, where rainfall proves a strong predictor of widespread and severe child wasting, to provide a simple empirical illustration of the potential contract designs.

Insuring Against Drought-Related Livestock Mortality: Piloting Index Based Livestock Insurance in Northern Kenya

Climate related shocks are among the leading cause of production and efficiency losses in smallholder crop and livestock production in rural Africa. Consequently, the identification of tools to help manage the risks associated with climactic extremities is increasingly considered to be amongst the key pillars of any agenda to enhance agricultural growth and welfare in rural Africa. This paper describes the application of a promising innovation in insurance design – index‐based insurance – that seeks to bring the benefits of formal insurance to help manage the weather‐related risks faced by rural crop and livestock producers in low‐income countries. In particular, we highlight the research and development agenda of a comprehensive effort to design commercially viable index‐based livestock insurance aimed at protecting the pastoral populations of Northern Kenya from the considerable drought‐related livestock mortality risk that they face. Detailing the conditions that make the pastoral economy in Northern Kenya an ideal candidate for the provision of index‐based insurance products, the paper describes the contract design, defines its structure, offers analysis that indicates a high likelihood of commercial sustainability among the target market and describes the process of implementation leading up to the launch of a pilot in Marsabit district of Northern Kenya in early 2010.

Explaining index-based livestock insurance to pastoralists

Purpose - The purpose of this paper is to present the methods and findings of an experimental game designed to extend the concept of index-based livestock insurance in northern Kenya, and analyze patterns of game play. The paper is designed to inform others who may be attempting something similar to this work in other developing country agricultural settings. Design/methodology/approach - The paper presents the following: descriptive context of the issue, explanation of the game design to match the conditions in the area, details of how the authors explained the game, and regression analysis of play by participants. Findings - Games designed to reflect key elements of the local production system can be an effective way of explaining financial products to rural producers in developing countries. Research limitations/implications - It remains to be seen if the extension effort leads to more informed consumers of insurance products, which the authors hope to address in future work. Also, the approach described in this paper is very labor intensive, which could limit use in a wide ranging extension program. Social implications - The authors were able to explain the idea to groups that were mixed: female and male. It will be interesting to see if there are any gender dimensions to insurance use. In addition, with competing claims to livestock with complex property rights, there is a need to monitor how insurance interacts with social ideas of livestock ownership. Originality/value - This is a completely new idea in the area of arid and semi-arid livestock production, the challenge is pronounced, and as insurance becomes more important in the development economics toolkit, the authors believe others can benefit from seeing what they have done.

Index-Based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Asian Countries

This paper explores innovations in index-based risk transfer products (IBRTPs) as a means to address important insurance market imperfections that have precluded the emergence and sustainability of formal insurance markets in developing countries, where uninsured natural disaster risk remains a leading impediment of economic development. Using a combination of disaggregated nationwide weather, remote sensing and household livelihood data commonly available in developing countries, the paper provides analytical framework and empirical illustration on showing design nationwide and scalable IBRTP contracts, to analyse hedging effectiveness and welfare impacts at the micro level, and to explore cost effective risk-financing options. Thai rice production is used in our analysis with the goal to extend the methodology and implications to enhance development of national and regional disaster risk management in Asia.

Index insurance for pro-poor conservation of hornbills in Thailand

This study explores the potential of index insurance as a mechanism to finance community-based biodiversity conservation in areas where a strong correlation exists between natural disaster risk, keystone species populations, and the well-being of the local population. We illustrate this potential using the case of hornbill conservation in the Budo-Sungai Padi rainforests of southern Thailand, using 16-y hornbill reproduction data and 5-y household expenditures data reflecting local economic well-being. We show that severe windstorms cause both lower household expenditures and critical nest tree losses that directly constrain nesting capacity and so reduce the number of hornbill chicks recruited in the following breeding season. Forest residents’ coping strategies further disturb hornbills and their forest habitats, compounding windstorms’ adverse effects on hornbills’ recruitment in the following year. The strong statistical relationship between wind speed and both hornbill nest tree losses and household expenditures opens up an opportunity to design wind-based index insurance contracts that could both enhance hornbill conservation and support disaster-affected households in the region. We demonstrate how such contracts could be written and operationalized and then use simulations to show the significant promise of unique insurance-based approaches to address weather-related risk that threatens both biodiversity and poor populations.

The Viability of Weather-index Insurance in Managing Drought Risk in Rural Australia:

Agriculture is the trade of rural Australians and managing weather risk have implications for Australian demographics. Consequently, we looked into the strategies farmers adopted to manage their revenue risk due to drought with a focus on wheat farmers. The prospects of managing the challenges of indemnity-based insurance with rainfall index insurance were discussed. We established the relationship between yield and cumulative standardized precipitation indices and concluded that a strong relationship between the rainfall index and yield does not necessarily lead to high hedging efficiency. The hedging efficiency of the product was analyzed using the mean root square loss, conditional tail expectation and certainty equivalence of revenue while the spatial and temporal nature of the risk were captured with loss ratios. It was observed that the inverse relationship between price and yield offsets some risks and reduces the efficiency of weather hedges. Differences were observed in the hedging efficiency across locations and efficiency was noted to be dependent on the methodology adopted. The results from the loss ratio analysis showed that pooling insurance contracts reduced risk to the insurer. We concluded that other variables would have to be taken into consideration in order to make the design of weather-index insurance more robust and that tax incentives on insurance premium would motivate farmers to be profitable.