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Mongolia: Development of Index-Based Livestock Insurance

Mongolia: Development of Index-Based Livestock Insurance

This project was conceived and brought to FIRST initially by the World Bank insurance team, who in turn were working with a Sustainable Livelihoods Project team in the Bank, in March 2005. In discussion with the Government of Mongolia (GOM) it was decided to design an insurance scheme to protect against the exposure of livestock to climactic disaster.

Livestock is a major component of the Mongolian economy involving a substantial proportion of the population, and supplies both domestic and export markets (mainly to Russia and China). Periodically some areas of the country are subject to extreme climactic events which cause high levels of livestock mortality and impose strains on the GOM budget for disaster relief. One of the worst events is the so-called “dzud” where in extreme winter conditions the livestock are unable to access natural fodder.

The collaboration with the Sustainable Livelihoods team made sense since improved techniques in husbandry — for example, strategic locations of winter fodder stores – should ameliorate the insurance risk.

The basic idea behind the project was to develop a mortality index-based insurance scheme that would automatically trigger claims payouts when a disaster occurs. The pay-outs would be assessed on a consistent basis for a particular geographical area (“Sums” in Mongolia) and would be paid only after a first loss tranche was borne by the herder, and would also be capped to a level beyond which the GOM would then pay out. The insurance would, therefore, be essentially a buffer in an extreme disaster between the herder and the GOM. In the next phase of this project, the World Bank also provided a loan commitment that the GOM could draw on if needs be to fund any excess claims beyond the insurance scheme’s cap.

The project involved several elements:

  • Designing the scheme
  • Advice on drafting the legal and regulatory framework for the scheme including contracts with the participating Mongolian insurance companies
  • Testing mortality data and developing data collection and monitoring system
  • Selecting suitable areas (“Sums”) for piloting the scheme

The project and its follow-on phases (FIRST has continued to support the second phase, mainly on legal and regulatory inputs) were spread over about five years so far and is now nearing roll-out country-wide.

Lessons Learned:

  • A project of this nature is essentially high-risk in that it breaks new ground and requires substantial testing (the results of which may prove the scheme to be either viable or non-viable)
  • Substantial time is involved in mobilising Government support at Cabinet level and also Parliamentary level, private sector insurance support and local herder support
  • Data collection and integrity are key. It is the data that ultimately triggers the quantum of aggregate claims.
  • Rigorous systems for loss assessment at herder level are needed. The idea behind the scheme is that efficient herders will benefit through mitigating their loss as against inefficient herders. For an over-simplified example, supposing the area wide mortality is 30%: then the pay out to all herders would be set at that level. An efficient herder might only suffer an actual loss of say 25%, but would still receive the 30% pay out. On the other hand, an inefficient herder might suffer an actual loss of 35%, and still only receive a 30% payout.
  • Where data is sound or capable of being sound, combined with effective claims management procedures, the index-linked approach enables fast claims settlement that is demonstrably even-handed.
  • The index-linked approach should be replicable where livestock is exposed to extreme climactic risk providing other suitable pre-conditions exist. In Mongolia, the main risk is extreme winters but in other parts of the world this maybe, for example, drought or flooding.

Reports:

There is little point going through the highly technical outputs from this project that apply only to Mongolia. The attachments are therefore those which summarise the overall concepts of the project so that readers may judge whether there could be applicability to their countries.