Yabello, Borena -- The Oromia Insurance Company (OIC), in collaboration with USAID and the International Livestock Research Institute, held a ceremony today to mark the first payout of the Index Based Livestock Insurance (IBLI) to 510 policy bearers in Yabello, Borena. IBLI is an insurance product that is designed to protect pastoralists from livestock loss resulting from prolonged drought.

For three years, USAID and the International Livestock Research Institute have been working closely with OIC to make IBLI available and accessible as a financial tool. This year, the IBLI triggering index indicated that the Dugdawa and Yabello woredas (districts) of the Borena Zone reached the strike level, triggering a payment to pastoral and agro pastoral households and groups. The total payout was approximately USD $28,500.

Knowing precisely what to expect in a drought year—particularly how many animals you are likely to lose during periods of severely low rainfall—is like having a crystal ball.

In eastern Africa, herders tending some18 million grazing cows, goats, and sheep can now have that foreknowledge thanks to satellite imagery and a unique USAID activity that allows insurance companies to issue ‘index based’ insurance covering livestock.

The USAID supported IBLI project, a winner of the USAID Science and Technology Pioneers Prize, has been incubating for decades since a group of economists from several universities—notably UC Davis and Cornell—and the International Livestock Research Institute began investigating the impact of droughts on African herding families in the early 1990s. They watched the herders fall into poverty time and again following episodes of famine, when their herds died off to a critical number and could not be replenished.

“We knocked around some ideas and wondered, was there a way to use that information and turn it into a reliable predictor of livestock mortality?” explains Dr. Michael Carter on the evolution of IBLI over the course of a generation of research.

Droughts have hit the Horn of Africa frequently in recent years—five since 2000—leaving herders more vulnerable and unable to restore their herds naturally to their pre-drought numbers. Many fell into dependence on food aid.

The team looked at data collected on livestock deaths from famine and compared it to the satellite vegetation imagery, which NASA has been collecting for 20 years. The readily accessible—and free of charge—NASA images were used to track forage availability and assess rainfall, literally by measuring the levels of visible greenery. NASA’s satellite imagery may not predict the rain, but it shows researchers the amount of healthy vegetation available to herders in a given period of time and specific land area. Analyzing years of available data against those real-time maps can accurately (92 percent) predict the number of animals likely to die in a drought.

Forecasting the future in a drought year was useful, but the success of using the satellite data to predict animal deaths was only part of the development story. The team soon realized the predictions were precise enough that insurance policies could pay out automatically when the satellite data triggers them, without sending adjusters to the field to count cow carcasses.

Index insurance products for weather risks are a new notion, and few insurers in developing countries know how to design them. “We really needed to convince the insurance companies that this was both actuarially sound and that there was a demand for such a product,” says IBLI project director Andrew Mude.

Agricultural insurance is uncommon in developing countries. Although the concept of index-based crop insurance is gaining popularity, insuring livestock was unheard of until the 2010 IBLI pilot rollout in Kenya. Now it has expanded to other areas of northern Kenya and to neighboring Ethiopia.

In Ethiopia, the most common index is rainfall, a measure which has been shown to provide only marginal protection because the correlation between rainfall and losses is weak. Insurance that doesn’t pay out when households experience loss is not sustainable or effective at promoting economic resilience in the community.

To counter the traditional rainfall measurement index, IBLI used satellite data to measure vegetation based on ground cover. As a result, index based livestock insurance has the potential to transform vulnerable pastoralists into resilient, vibrant market participants with high growth potential.

“It’s a promising concept,” says Dr. Mude. In fact, he sees potential for IBLI scale up and replication in Uganda, further into West Africa and even adapting it to India.

Still, insurance is a fresh idea that requires effective outreach and education for it to succeed. In Kenya, acceptance was initially tested using a game where poker chips represented cattle, sheep, and goats and participants had the choice of purchasing the insurance policy. The IBLI product was then sold in northern Kenya beginning in 2010. Payouts were triggered by the satellite data tracking the 2011 drought, when low levels of vegetation predicted higher than 15 percent of herd losses.

Traditionally, herders in the Horn of Africa have coped with the threat of drought by keeping mobile, by sharing grazing areas that are periodically left fallow to regrow, and by building communal water points for their animals. In drought years when healthy forage is far from abundant, they will trek as far as 100 kilometers over a season to find food for their livestock.

These herding communities often share burdens of tragedy, and when a family loses part of its herd, this communal support can include gifts of livestock. But in a famine year, this behavior changes. As team member Dr. Chris Barrett notes: “The capacity for mutual support is limited when a drought hits. Everyone is affected.”

Insurance provides opportunities for resilience by reducing vulnerability and providing people an opportunity to withstand and recover from shocks and to improve their quality of life.

Lena Heron, senior rural development adviser in USAID’s Bureau for Food Security, notes: “By helping to facilitate the development of this important tool, USAID is helping to shift vulnerable pastoralists to a position of resilience, where they will be less dependent on humanitarian aid and better positioned to engage in economic opportunity, even as the climate continues to change.”

USAID's Pastoralists Resilience Improvement through Market Expansion (PRIME) activity, implemented by Mercy Corps, supported OIC in insurance market product development, promotion and public awareness. OIC is a private insurance company in Ethiopia.