What is insurance?
Insurance is a formal transfer of risk to an insurance company. It is the protection of assets against specific perils in exchange for regular premium payments proportionate to the likelihood of risk occurrence and the cost involved. Insurance enables the purchaser to get compensation if the insured risk occurs within the time span of the contract period.
What is Index-based Insurance?
Like any insurance product, the purpose of index-based insurance (IBI) is to compensate clients in the event of a loss. IBI is used to protect against shared rather than individual risk such as the risks associated with weather fluctuations, disease out breaks or price loss. Unlike traditional insurance which assesses loses on a case by case basis and makes payouts based on individual client’s loss realizations, IBI offers policy holders a payout based on the external indicator which triggers a payment to all insured clients within a geographically defined space.
How does index-based insurance work?
For index insurance to work there must be a suitable indicator variable (the index) that is highly associated with the event being insured but is not prone to manipulation by either the insured or insurer. For example, if one is insuring against forage scarcity, then an indicator such as rainfall or forage availability may be suitable. The idea would be that rain failure during the rainy season, shortage of available forage, or a combination of the two would result in some level of livestock stress. Having sufficiently modelled this relationship, one could then write an insurance contract based on a rainfall or forage indicator to protect against various degrees of aggregate livestock losses. Users pay a regular insurance premium and receive payouts when an index (linked to poor agricultural production outcomes e.g. rainfall failure; or one linked to forage availability) crosses an agreed trigger point.
What is the advantage of index-based insurance product?
IBI makes a payment when a geographic area based indicator that is highly associated with the risk outcome being insured against (e.g. forage scarcity) is triggered. This differs from traditional insurance which requires that the insurer monitor the activities of their clients and verify the truth of their claims on a case by case basis. For relatively small clients in infrastructure deficient environments the costs of such monitoring are often overly prohibitive. With index-based insurance products, all one has to do is monitor the index. Traditional insurance also suffers from a problem commonly described as “moral hazard” – the tendency for an insured person to be more negligent of protecting their insurance against loss, since the insurance guarantees that he/she is paid in the event of loss. Traditional insurance also suffers from “adverse selection” problem where more risk-prone individuals will self-select into the contract. These two problems can make traditional insurance commercially unsustainable. On the other hand, IBI does not suffer from these two problem since the index is based on aggregated regional variables instead of individual risk-proneness and behaviors.
What are the possible limitations of indexed based insurance product?
A possible limitation of IBI is “basis risk” – this refers to the imperfect correlation between an insuree’s potential loss experience and the behaviour of the underlying index on which the insurance product payout is based. It is possible that individuals suffer losses specific to them but fail to receive a payout because the index does not trigger. On the other hand, lucky individuals may receive indemnity payments that surpass the value of their losses. While this problem cannot be completely eliminated, one can carefully design the IBI contract to minimize basis risk and therefore to maximize its value to the insured population.
What is Index Based Livestock Insurance (IBLI)?
Index-Based Livestock Insurance (IBLT) is a product that is designed to protect against prolonged forage scarcity. IBLT triggers payment to pastoralists to help maintain their livestock in the face of severe forage scarcity
What types of risks are covered under IBLI (the insurance being sold)? Does it give insurance coverage for livestock death from any causes?
IBLI is insurance for drought only. It is a contractual agreement to pay policy holders proportional to the esevere forage scarcity experienced as a result drought. The availability of pasture is tracked from vegetation imagery by satellite. IBLI does not give insurance coverage for livestock asset lose due to other causes like predation, disease, raids etc.
Who is eligible for Indexed Based Livestock Insurance?
Any livestock keeper within the counties of Marsabit, Isiolo and Wajir, Mandera, Garissa in Northern Kenya and in the Borana region of Southern Ethiopia, who is willing and able to pay for insurance for their livestock.
If drought does not occur for the period I buy insurance, do I get back the premium I paid or if there is no drought for 2-3 years am I losing money?
Premium paid to get risk protection is non-refundable. No, buying insurance is not losing money. If drought has not occurred one year, it may occur in another year.IBLI could be compared to hiring a guard to protect one’s property all the time. Though you know property can be robbed, you do not know the exact time when robbers might come – and would wish that they never come. You have not lost the salary you paid to a guard from year to year to protect your property. Similarly, the premium you pay is not money lost as you have got protection against drought risk which could occur anytime.
Is the premium I pay for IBLI saved for me like money put in bank?
No, IBLI is not a savings product, paying premium is completely different from saving money in bank. If you put money in bank you may withdraw some other time when you need. While by paying premium, you are purchasing the service of protection for your livestock asset against the occurrence of drought.
How long will my livestock be insured after I pay one-time premium?
IBLI has an annual contract and the annual premium provides cover only for one year. In order to get continuous protection, you need to activate insurance contract annually by paying premium charged by the IBLI provider.
Will I get paid if I lost my animals to disease, cattle rustling, or wild animals?
No. IBLI pays out only when the index, based on the availability of vegetation triggers. This index is drought related. Drought is the biggest risk facing pastoralists. In addition, unlike disease, cattle rustling and other risks, the risk from drought is a shared problem.
Where can I purchase a policy cover for my livestock?
For Marsabit you can purchase a policy cover from an APA Insurance agent who will be designated at different towns both in lower and upper Marsabit. For Isiolo you can purchase a policy cover from agents of APA Insurance and Takaful Insurance of Africa in Isiolo town. For Wajir you can purchase a policy cover from the Takaful Insurance of Africa office in Wajir town and other neighboring towns. For Mandera and Garissa you can purchase IBLI from Takaful Insurance of Africa in Mandera and Garissa town respectively.
What do I need to purchase a livestock cover for my livestock?
You will need a national identity card for purchasing the insurance from the IBLI/IBLT agent. The Agent will want to know insured’s full names, id number, district and location of residence, and gender. They will also record fingerprints. But before you go to purchase the insurance you will need to have decided how many livestock you want to insure as this will determine how much you will need to carry to pay for the insurance.
When can I purchase a policy cover for my livestock?
IBLI policy cover will sold two times a year; from 1st August to 1st September and from 1st January to 28th February. The cover will run from beginning of October to the end of September and March to end of February the following year, depending on when the contract was purchased.
Why can’t I purchase a livestock cover for my livestock whenever I want?
You cannot purchase a policy whenever you want because the insurance index that initiates a payout is dependent on the forage conditions around your geographic area. For this reason, you can only purchase the insurance before the onset of the long rains seasons and before the short rain season.
What types of livestock can I insure?
IBLI covers the four key livestock types: Camel, Cattle, Goats and Sheep. However, these four livestock types are standardized into a unit known as a Tropical Livestock Unit (TLU) which is calculated as follows: 1 Cattle = 1 TLU: 1 Camel = 1.4 TLU: 1 Goat or 1 Sheep = 0.1 TLU.
If I want to insure only part of my livestock, how will I choose which ones to insure?
You do not need to choose which livestock to insure because the insurance payout will not be based on whether specific animals die, but on the satellite readings on forage availability in the area. You only therefore need to indicate the number of livestock (TLU) that you want to insure.
How will the livestock to be insured be valued?
Taking the average value of livestock in the area and the method of standardization translating livestock types into TLU, a constant value of TLU has been set for Indexed Based Livestock Insurance. This values has been set as follows:
- Marsabit – TLU = 14,000 KES
- Isiolo – TLU = 14,000 KES
- Wajir – TLU = 14,000 KES
- Mandera -TLU = 14,000 KES
- Garissa -TLU = 14,000 KES
For what period is the insurance valid?
Indexed Based Livestock Insurance will have a coverage period of one year. Insurance purchased between January and February will be valid from March of that year to the end of February in the following year. If the insurance has been purchased between August and September, it will be valid from October of that year to the end of September in the following year. IBLI will have two possible payout periods, one during the long dry period in August and the other at the end of the short dry period in February. The state of the index at these times will be announced and where the index is beyond the strike point, the relevant insurance payments will be made.
What is the strike level?
The index threshold below which payouts must be made is called the strike level. Supposing the forage conditions are ranked from 1- 100 with 1 being the worst and 100 the best. The strike level is then set such that if the forage conditions for the current contract season is ranked 20 and below, the contract will pay out. Therefore, the strike level is set at the 20th percentile. In other words, IBLT will compensate if the forage condition will fall below the worst 20 percentile of seasonal pasture levels in the contract area.
How is the payout determined and who determines this?
The payout will be determined by the level of forage scarcity indicated by the index. Where forage scarcity is below the trigger point, a payment will be made. The International Livestock Research Institute (ILRI) will record the progress of the index and announce its value during the potential payout periods at the end of July and the end of January. The insurance companies (APA Insurance and Takaful Insurance of Africa) will then pass the information to customers, and their representatives in government, NGOs and other such organizations.
When and how will I know whether there will be a payout?
If the forage scarcity for the division where you insured your livestock is below the strike point, you will receive a payout. There is a website (https://livestockinsurance.wordpress.com) where you can get information when the trigger level has been attained. The chiefs will announce this information in the respective locations where the trigger level has been attained. There will also be communication through the local radio stations.
How will I know how much I will be paid?
Your payment will be calculated by multiplying the value of TLU you insured by a response function and the strike level.
What do I need to do to get my payout?
You will need to carry a national identify card and the receipt you receive the first time you buy insurance from the insurance company.
If there is no insurance payout, can I get back the premiums paid?
No, premiums are non refundable. Once the premium is paid, it cannot be returned even if there is no trigger to initiate a payout.
Is it possible for me to suffer a livestock loss related to lack of pasture and not get a payout?
Yes, this is possible. This is because for there to be a payout, the forage scarcity needs to be less than the strike point for that area.
If the strike level for a division in Marsabit e.g. Maikona is 15th percentile, this means that if the forage scarcity is at the 15the percentile the people in Maikona will receive a payout. The same principle applies in divisions of Isiolo and Wajir as well.
My friend in Southern Wajir had insured the same number of livestock as i did yet he got a higher payment than I did; why is this?
As you know Wajir has 14 divisions. Each of the divisions have different premium rates. These premium rates are determined for each division based on the potential for possible droughts in each division. So if you come from Haddado in the South, the premium will be higher for Haddado as compared to Bute which is in the North. The reason being, the possibility of drought in Haddado is higher compared to Bute. Therefore, the forage availability data will be monitored per division. It is possible that the forage scarcity for Haddado in South Wajir will be different from Bute which is in North Wajir.
Assume that Hussein from Maikona insured 10 TLU and Shabbir from North Horr in Marsabit also insured 10 TLU. Assume that the forage scarcity is at the 20th percentile for North Horr and 15th percentile for Maikona. If the trigger level is the 20th percentile, then Hussein will receive a minimum payout since in his division the forage scarcity is equal to the strike level .
Does Indexed Based Livestock Insurance encourage people to neglect their livestock?
It does not. This is because IBLI pays depending on the index which means that the people insured will receive a payout based on the forage scarcity and not their individual losses. Therefore they should continue putting effort into ensuring their livestock do not perish as they might even receive a payout regardless of the condition of their livestock.
Is the payout in the form of livestock or cash? If it is cash, do I have to buy livestock with or shall I put it into some other uses?
The payout will be in the form of cash. There will be no forced requirement on how that cash will be used. You could put it into different use like savings, getting better feed for livestock, engaging in a small business or otherwise.
Who can buy IBLI ?
Any person who owns at least one shoat (Sheep or goat) and whose livestock graze in one of the 8 woredas in Borana Zone under IBLI coverage can buy IBLI insurance.
If I insure pregnant cattle and it gives birth during active insurance contract period, will the new born calf be under insurance coverage?
No, your calf does not get insurance coverage, if you have paid premium only for one animal. Premium is to be paid for each head of livestock. But if you want you can buy a policy for the calf to be born by paying the amount of premium assigned for cattle.
Is it possible to quit the insurance contract for a certain period and then activate it again some other time?
Insurance purchase is voluntary and coverage period is usually for one year. This means that when you purchase insurance for a head of livestock, you pay a premium that gives you protection for the agreed value of that insured livestock per insurance terms given to you for one year. For your asset to remain under insurance protection for subsequent years, you are required to pay additional premium charges every year. If not, your contract agreement expires, and your livestock will not have insurance protection. If you want another insurance contract after your original contract for that year has expired for some time ( a year, two or so), you are free to buy the contract again any time.
Why does the insurance product you sale (IBLI) provide coverage for drought risk only not for predation or death due to diseases?
The provision of insurance services for drought is made possible by tracking forage scarcity through vegetation imagery by satellite. Tracking forage availability over a period of time, enables insurance companies to compensate policy holders without the need to go around to count livestock die-offs.
For individual compensation, one-by-one loss assessment is mandatory to verify predation or death due to disease, and loss due to raids, which is difficult. Furthermore, drought is the major cause of livestock losses for the Borana community and other pastoralists. Finally, insurance principles also dictates that the insurance product be sold for specific risk like drought not for combination of many risks like predation, diseases, theft and accidents at the same time.
What Index does IBLI use?
The index of Index Based Livestock Insurance (IBLI) product for Borana is derived from vegetation imagery, to measure the level and density of pasture available to livestock. The index is called cumulative deviation of forage availability. It simply measures the forage condition over defined time period and for geographical areas of interest starting from as low as 250m by 250m aggregating to village, kebele and woreda, etc.
How does NDVI measure forage availability?
NDVI measures availability and density of pasture by tracking vegetation imagery over the rangeland to estimate the magnitude of livestock loss incase of a drought. Scarce pasture means livestock do not have feed and can gradually die if feed continues to deteriorate over time and geographical locations
How NDVI is used to calculate the index of IBLI?
To calculate the IBLI index:
First the greenness of vegetation (pasture) of the current 16 day period is measured by the satellite
Then this current 16 day period of pasture- performance is compared to what is usually the normal average for the same period of time in a year, over the past 30 years to know how much the current pasture has deviated. (since drought is a slow onset of disaster and when interpreted in a context of rangeland, it means a continuous deterioration of forage availability that finally leads to large die-offs of livestock).
Finally, the 16 days deviation of pasture is cumulated over insurance coverage (from the 1st date of expected rain for a season to the last date of expected end of the dry season that follows) to construct the index that measures forage availability overt time.
What is contract strike or trigger? How is it related to drought?
Contract strike or trigger means simply the level of pasture availability measure beyond which if it deteriorates, policy holders start getting a payout. It is set by using information based on 30 years historical data and considering the premium level pastoralists can afford. It is part of the contract agreement. Strike or trigger of the contract is related to drought as it is set based on 30 years historical data of pasture availability in such a way that seasonal pasture levels amounting to historical drought seasons in the past thirty years will fetch compensation for policy holders
How do we know whether there is a payout?
The index is tracked starting from the day the insurance contract is in effect to the end of a season every year (one season is from October 1 to February 28/29, and the other season from March 1 to September 30).
The index reading for the current season is announced to policy holders at the end of a season and if it is in the drought designated system, compared to the pre-agreed strike level index of below the 15 percentile , policy holders will receive a payout.
Can satellite pictures differentiate forage from trees or bushes?
Though the imagery does not tell directly whether the observed vegetation is bush or grass, it definitely indicates how the pasture in an area is performing compared what has been normal for that particular area, at that particular period of the year.
You say the satellite shows the degree of greenness of an area, but can it show, for instance, whether grass is available or not under trees or bushes?
It is not possible to identify a grass under a tree but it is possible to know the severity of drought by analyzing pasture performance over time and enabling pastoralists to get compensation when they are affected by severe drought
In some areas like Arero and Yabello mountain parts, trees like acacia are usually green in drought conditions, so how can satellite recognize drought in such cases where some species of trees remain green even in drought situations
The reason that the index compares the current satellite reading with the historical average is because even where the trees or bushy vegetation that are not eaten by livestock, the average level of green will still be less than what it usually is during times of drought. It is this difference that is recognized
What is the cost (of premium) of getting insurance coverage for my livestock?
Premium is the price of risk to be paid by the pastoralist who is buying IBLI, in order to get the settlement for the drought related livestock loss as per the contract terms. Since different livestock species have different values, the price of risk (premium) to be paid is proportional to that value.
Are the premiums the same for all locations?
No, the premium amount varies among geographical coverage locations (woredas), since the probability of occurrence of drought varies from Woreda to Woreda. For instance, drought is more likely to occur in Moyale and Miyo than in Yabello which means that the likelihood of payouts is more frequent in Moyale and Miyo than Yabello. Hence the more susceptible a woreda to drought, the higher the premium it is to be charged to get protection.
Are the premiums the same for different livestock species?
Different livestock species i.e. cattle, camel and shoats are charged different amount of premiums. Premium is paid for a single species or head of livestock. One can insure any number of livestock by paying premium proportional to the number of livestock s/he wants to insure.
How do you determined the market prices that have been assigned to different livestock species (e.g. Cattle=Birr 5,000, Camel=Birr 15,000, and Shoats= Birr 700)
The current market prices for different livestock can be higher than the prices we use for the purpose of IBLI. The prices are determined based on the average market price of livestock from Haro Bake livestock market price over 5 years. The price of a livestock species differs depending on the age, sex or body condition. But for IBLI, a fixed price, is needed as the premium to be paid now and potential settlement should be proportional to the value of the livestock asset to be covered by the insurance. However, if you feel the ox you want to insure can be valued for Birr 10, 000, it is your right to pay twice the premium paid for a cattle and get insurance coverage for two cattle.
What are the conditions for a payout?
In order for policy holders to get a payout, the level of forage available to livestock in the index coverage woreda, should amount to a drought level that triggers compensation.
How and where do I ask for compensation?
You do not need to report anywhere to get compensation. Since the insurance is index based, and if the level of forage available amounts to a drought situation, Oromia Insurance Company (OIC) will announce the timing of payment through DAs and/or available medias like Radio Oromia. Payment will then be effected through agents appointed by OIC.
How much of settlement will I get for a livestock when there is a trigger?
The amount of settlement one gets depends on the level of forage shortage. The milder the forage shortage, the lesser the amount of compensation; and the more severe the forage shortage, the higher the amount of settlement.
When are the potential payout periods?
Potential payout periods are twice a year, just at the end of the two dry seasons of Borana. The amount of settlement for one of the two seasons, can range from half of the annual premium amount paid incase of a milder forage shortage condition to a half of the total value insured if there is a severe forage shortage equivalent to the worst drought that has occurred since the past 30 years.
At what times in the year can we expect compensation if insurance triggers payout?
The IBLI contract is an annual contract that rolls either from October 1 to September 30 or from March 1 to February 28/29 the following year with potential payouts twice a year: one in October, at the end of Long dry season (Bona Adolessa), and second in March at the end of Short dry season (Bona Hagaya).
Do I get compensation if the index triggers, but there is no livestock death?
Yes, for you to get compensation, it is sufficient for the index to trigger. So even if your insured livestock are alive, you can receive a settlement.