Index Based Livestock Insurance Project, Mongolia

1
Index Based Livestock Insurance Project,
Mongolia

• PRESENTATION
• International Conference on Livestock Services
• Beijing, PRC
• April 17-20, 2006

2
BACKGROUND About Mongolia

• Official name of the country Mongolia
• Capital city Ulaanbaatar, founded in 1639
• Territory 1,566,500 sq.km
• Location Northern Asia, between China and Russia
  (landlocked)
• Population 2,6 million
• Political system Mongolia is a parliamentary
  republic.
• Legislature State Great Hural (Parliament),
  unicameral with 76 members elected for four
  years. The last elections were held in 2004.
• State structure Mongolia is a unitary state.
  Territory of Mongolia is divided administratively
  into aimags (21) and the capital city aimags are
  subdivided into soums soums into bags and the
  capital city into districts districts into
  khoroos.
• Language Mongolian
• Religion Buddhism

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BACKGROUND Livestock sector in Mongolia

• The agricultural sector contributes one third of
  national GDP in the Mongolian economy.
• Livestock husbandry, which has an 87 share of
  agricultural GDP supports at least half the
  population (an important source of income, jobs
  and food security, and a means for rural
  households to invest and store their wealth).
• The importance of livestock to the livelihoods of
  poor rural households has increased in recent
  years with the shift from collectivized farming
  to family-based herding during the 1990s the
  number of herding households doubled between 1990
  and 1997.
• However, the country is prone to extreme climatic
  events that can cause high rates of livestock
  mortality, jeopardizing rural livelihoods. In
  particular, the frequent droughts and severe
  winters/springs (known as dzuds) of 1999 and 2002
  caused loss of one third of the national herd.
  Many households lost all their livestock and
  their primary source of income, and GDP growth
  drop to 1.1.

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BACKGROUND Current Situation with Livestock
Insurance

• Very little livestock insurance is being sold
  today in Mongolia.
• Livestock risks are rightly considered to be
  uninsurable due to very large risk.
• Herders are dissatisfied past failures in paying
  indemnities poor insurance contracts low animal
  values on insurance.
• Lack of local offices/ branches to offer
  insurance in the country side.

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BACKGROUND Needs for New Livestock Insurance

• Livestock insurance is a key element of risk
  mitigation but the conventional approach to
  livestock insurance (based on individual losses)
  is not effective in Mongolian conditions and
  formal financial insurance products related to
  livestock mortality are unpopular with both
  insurance companies and livestock owners, except
  to a small number of high value livestock.
• Since 1995 three attempts of the Government to
  create and implement mandatory livestock
  insurance have failed due to lack of feasibility
  and expected high administrative cost.
• The index-based livestock insurance (IBLI)
  proposed under this project is linked to the
  direct outcome from dzud large numbers of
  livestock mortality. Also, it provides strong
  incentives to individual herders to continue to
  manage their herds so as to minimize the impacts
  of major livestock mortality events. The
  insurance would pay out to individual herders
  whenever the mortality rate in the local region
  (soum) exceeds a specific threshold.

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Projects Development Goal

• The IBLIP is to be implemented by the
  Government of Mongolia with financial assistance
  from IDA, World Bank, Japanese Government and
  FIRST Initiative from September 2005 to December
  2009 to enhance livelihood security of
  livestock-owning households by reducing their
  vulnerability from livestock mortality events.
• The development objective of the proposed
  project would be to ascertain the viability of
  index-based livestock insurance in Mongolia.
  This would be achieved through
• Developing and piloting IBLI program in three
  provinces of Mongolia and
• Building institutional capacity and legal
  framework for the prospective replication and
  scale-up of IBLI nationwide.

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Immediate Objectives of the Pilot

• To increase the understanding of herders risk
  management approaches and to learn if herders are
  willing to pay premiums at commercial rates for
  IBLI.
• To learn if insurance companies are willing to
  take risk and have the capacity to organize sales
  of IBLI.
• To gauge the interest of the international
  reinsurance community in participating in sharing
  risk during the pilot program.
• To aid in capacity building in the insurance
  sector, both with private companies and with
  regulators.
• To assemble elements needed to incorporate a
  proper business plan that includes marketing and
  distribution, financing, systems, governance, and
  human resource planning.
• To make certain that the program is maintained
  with integrity and with as few problems as
  possible regarding misunderstandings with the
  stakeholders.
• To develop a new approach for responding to
  catastrophic risk that creates a meaningful
  dialogue inside the Government of Mongolia
  regarding how the new approach can be used in a
  broader context of disaster assistance both from
  government and from the donor community.

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Longer Run Policy Goals

• A risk management approach to improve the
  financial sector and the market
• A social approach for extreme and catastrophic
  livestock losses
• Structured plans to finance large losses before
  they occur
• Policies that promote good management practices
  for herders, including appropriate stocking
  rates.

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Pilot Aimags

• Implementation planned for 3 provinces
  Bayankhongor, Khentii and Uvs.
• Provinces were chosen considering geographical
  dispersion (different types of climate and
  terrain), agro-climatic variation and relative
  risk (low correlation of livestock losses).

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Proposed IBLI Scheme

• Risk Management - Base Insurance Product (BIP)
• Voluntary participation
• Sold by approved commercial insurance providers
• Participating insurance companies pool their risk
• Index insurance based on animal mortality rates
  in each soum (smaller province)
• Government of Mongolia provides re-insurance to
  participating insurance companies.
• Social Solution - Disaster Response Product (DRP)
• Offered by the Government of Mongolia
• Voluntary participation
• Herders pay small fee to register their animals
• Provides monetary compensation to herders when
  soum losses reach catastrophic level
• Not a complete solution to dealing with
  catastrophic risk.

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Layers of the Risk

• 100 Mortality
• 30 Mortality
• 7 Mortality

Disaster Response Product
Base Insurance Product
Retained by Herders
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Financial Linkages

• Hedge default risk due to catastrophic events
• Hedge rural lending portfolios
• Index insurance purchased by NBFI.
• Delivery point for variety of financial services
• Index insurance sold at bank/NBFI branches.
• Clears the path for market innovation
• Development of more tailored insurance products.

13
NGO Linkages

• Complement to risk mitigation activities
• Could be used to organize mutual insurance for
  herder groups
• Supports risk management objectives
• Mechanism for smoothing herder income
• Structured, objective disaster payments
• Targeted payments.

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Thank you for the attention!

• For more information please visit our website at
  
• www.iblip.mn
• Project Implementation Unit
• Ulaanbaatar, Mongolia
• Fax [phone]
• E-mail info_at_iblip.mn