Pastoral populations of Sub-Saharan Africa are particularly vulnerable to environmental shocks, which contribute to livestock mortality and therefore losses in both wealth and productive assets. Although conventional insurance mechanisms covering individual losses are generally not cost effective  (page 2) in low-income pastoral communities that engage in extensive grazing, index insurance for livestock offers a promising alternative. Unlike traditional loss-based insurance, index based insurance uses an external indicator to approximate losses on an aggregate level over a particular area. Index insurance is also less susceptible to moral hazard because payout is independent of an insured client’s individual behavior, and less susceptible to adverse selection because the index is created from external variables unrelated to individual-specific risk. These advantages motivate the design behind the International Livestock Research Institute’s novel index based livestock insurance (IBLI) product.…..continue reading