Abstract
Climate related shocks are among the leading cause of production and efficiency losses in smallholder crop and livestock production in rural Africa. Consequently, the identification of tools to help manage the risks associated with climactic extremities is increasingly considered to be amongst the key pillars of any agenda to enhance agricultural growth and welfare in rural Africa. This paper describes the application of a promising innovation in insurance design – index‐based insurance – that seeks to bring the benefits of formal insurance to help manage the weather‐related risks faced by rural crop and livestock producers in low‐income countries. In particular, we highlight the research and development agenda of a comprehensive effort to design commercially viable index‐based livestock insurance aimed at protecting the pastoral populations of Northern Kenya from the considerable drought‐related livestock mortality risk that they face. Detailing the conditions that make the pastoral economy in Northern Kenya an ideal candidate for the provision of index‐based insurance products, the paper describes the contract design, defines its structure, offers analysis that indicates a high likelihood of commercial sustainability among the target market and describes the process of implementation leading up to the launch of a pilot in Marsabit district of Northern Kenya in early 2010.
Highlights
Downside‐production risk is a considerable constraint to agricultural production and development whose impact is felt by small‐holder farmers and livestock keepers whose meager resource base offers them with few effective options to manage this risk
Since the late 1980s, the United States’ National Aeronautical and Space Administration (NASA) and National Oceanic and Atmospheric Administration (NOAA) have used Advanced Very High Resolution Radiometer (AVHRR) data1 to produce dekadal (10‐day) composite normalized differenced vegetation index (NDVI) images of Africa at a resolution of 8.0 x 8.0 km a day, and have built a valuable archive of these data from June 1981 to present, which are available in real time and free of charge
The effort to design and pilot index‐based livestock insurance (IBLI) as a commercially sustainable tool to help the pastoralists of Northern Kenya to insure themselves from drought related livestock mortality has largely been a success
Summary
Downside‐production risk is a considerable constraint to agricultural production and development whose impact is felt by small‐holder farmers and livestock keepers whose meager resource base offers them with few effective options to manage this risk. As is true in most of rural Africa, thin markets, poor physical and institutional infrastructure and weak access to credit and savings markets compound the problem of production risk that poor farmers and livestock keepers face. In much of rural Africa, where water harvesting, irrigation and other similar water management methods are under developed and the impacts of climate change are expected to be especially pernicious, managing agricultural production risk becomes increasingly important (Thornton et al 2008; Hellmuth et al 2007). Index‐based insurance products represent a promising and exciting market‐based option for managing climate related risks that vulnerable households are exposed to
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