Drought-stricken Kenyan livestock farmers receive first insurance payouts

An official discusses insurance payouts with local livestock owners at the IBLI payout event in Kenya’s northern Marsabit District.

In the midst of a drought-induced food crisis affecting millions in the Horn of Africa, an innovative insurance program for poor livestock keepers made its first payouts Oct. 21, providing compensation to some 650 insured herders who have lost up to a third of their animals in northern Kenya’s vast Marsabit District.

Known as Index Based Livestock Insurance or IBLI, payouts are triggered when satellite images show that grazing lands in the region have deteriorated to the point that herders are expected to lose more than 15 percent of their herd. The current readings for which indemnities now being paid show that between 18 and 33 percent of livestock have been lost to drought this season.

The insurance project was developed in partnership between Cornell and the Nairobi-based International Livestock Research Institute and the Index Insurance Innovation Initiative program at the University of California-Davis; it was first launched in 2010 in Kenya’s northern Marsabit District.

IBLI was initially developed at Cornell in a series of collaborations between Chris Barrett, the Stephen B. and Janice G. Ashley Professor of Applied Economics and Management and professor of economics; Andrew Mude, Ph.D. ’06, IBLI project leader at ILRI; and Sommarat Chantarat, Ph.D. ’09, a research fellow at the Australian National University whose dissertation on the IBLI contract design won the Outstanding Doctoral Dissertation Award in 2010 from both the National Research Council of Thailand and the Agricultural and Applied Economics Association.

"In the midst of a very serious drought, the contract has triggered the first indemnity payments; these are now being made to policy holders," said Barrett. "We hope and expect that this will help cushion them against the catastrophic outcomes of this devastating drought and accelerate their communities’ recovery from a major disaster," he added.

Under the terms of the policy, insured herders are compensated for any losses above 15 percent, with the 15 percent threshold acting as a sort of deductible. For example, a cattle herder who lives in an area with a livestock mortality rate of 33 percent receives a payout covering 18 percent of his or her animals.

When the 15 percent deductible is factored in, compensation ranges from 3 percent in areas where the drought has been more moderate to 18 percent in the areas where herders were hit particularly hard. But in an indication of the severity of the drought, all of the areas where the policies were sold have exceeded the 15 percent mortality threshold that triggers a payout. Thus far, the policies cover about 1,100 animals -- mostly cattle, but some goats and sheep and a few camels as well.

One major success thus far is that the livestock mortality index, which is at the heart of the program, appears to be working. The fatality rate predicted by the satellite assessments of forage loss is tracking very closely to surveys of animal deaths on the ground.

The payments are being dispatched in the middle of a humanitarian crisis endangering 12 million people in the Horn of Africa.

"This is a wholly privately funded product. Indeed, the insurance company and reinsurer have made a little money on this product even with a payout within 18 months of product launch," said Barrett.

Commercial partners Swiss Re, Equity Bank and UAP Insurance Ltd. implement the program.