Microinsurance

From Mongol Studies Online Reference

In Mongolia, economic activity has largely centered on herding and agriculture. While the sector forms approximately 18.8 percent of the country’s GDP, 39.9 percent of the labor force is employed by this industry.^[1] Furthermore, the number of herding families doubled between 1990 and 1997.^[2]

Because of the risks associated with agriculture, such as its vulnerability to weather, foreign competition, imperfect information, poor infrastructure, seasonality, and outdated technology, investing in this sector is seen as riskier than investing in trade or industry. For instance, the dzuds that occurred between 1999 and 2002 destroyed over a third of the livestock. ^[3]

Addressing this issue has been difficult, but developments in microinsurance offer the opportunity to mitigate these losses.

[edit] Index-Based Livestock Insurance

In 2001, the Government of Mongolia asked the World Bank for assistance in addressing the issue of the high death rates of the country’s livestock. The primary recommendations involve a combination of self-insurance by herders, and market-based and social insurance. Essentially, herders would retain small losses, the private insurance industry would retain larger ones, and the Government of Mongolia would retain catastrophic losses through a public safety net program.

The insurance program relies on a mortality rate index by species in a soum. Herders receive an insurance payout based on local mortality, not based on individual losses. Risk management with respect to livestock requires not only implementing pastoral risk mitigation programs, but also establishing a livestock insurance program. ^[4]

In May 2005, the Index-Based Livestock Insurance Project was approved. It was created to determine the feasibility of index-based livestock insurance in Mongolia through pilot testing of insurance schemes in three provinces of Mongolia.^[5]

GlobalAgRisk has worked with the World Bank to develop the Index-based Livestock Insurance Pilot. In its second pilot year, 13 percent of eligible herders purchased the insurance.^[6]

GlobalAgRisk is a company that focuses on improving financial services for the rural poor through insurance programs related to weather risk. Currently, the company has projects in Mongolia, Peru, and Vietnam. The company argues that lenders can attempt to pool risk, although this may lead to poor results if the risks of borrowers are correlated. However, household incomes are neither completely independent nor completely correlated. Although microfinance insurance helps deal with pooling independent risk, there is still the issue of correlated risk.^[7]

Traditional individual livestock insurance was not effective in Mongolia due to issues such as high loss adjustment costs, failure to take effective measures to protect livestock, and false animal death reports.^[8]

GlobalAgRisk has considered creating a weather index insurance that does not require inspection of losses. However, it mainly covers correlated risks and is mostly for single peril coverage. Furthermore, the weather system is under-funded and classification of risk is problematic.^[9]

However, the index-insurance pays indemnities when the adult animal mortality rate exceeds a specific threshold for a given region, thereby providing an incentive to herders to continue to manage their herds. Regardless of whether an individual herder has suffered losses, everyone in the area will receive a payment.^[10]

[edit] See Also

• The Microinsurance Centre
• GlobalAgRisk, Inc.

[edit] References

1. ↑ "Mongolia." The Central Intelligence Agency. Retrieved on 2008-08-12
2. ↑ Mahul, Olivier & Skees, Jerry. "Managing Agricultural Risk at the Country Level: The Case of Index-Based Livestock Insurance in Mongolia."
3. ↑ Hishigsuren, Gaamaa. 2006. Information and Communication Technology and Microfinance: Options for Mongolia. Asian Development Bank. Retrieved on 2008-07-22.
4. ↑ Mahul, Olivier & Skees, Jerry.
5. ↑ The World Bank. (2005-05-02). Mongolia – Index-Based Livestock Insurance Project Report 32220-MN. Retrieved on 2008-07-01.
6. ↑ GlobalAgRisk,Inc. "Where We Work." Retrieved on 2008-08-12.
7. ↑ Skees, Jerry. "Weather Index Insurance, Lending to Small Farmers, and Credit Risk Management." 29 May 2008. 11th MFC Conference of Microfinance Institutions. Ulaanbaatar, Mongolia. Retrieved on 2008-08-12.
8. ↑ Mahul, Olivier & Skees, Jerry. "Piloting Index-Based Livestock Insurance in Mongolia." Access Finance. March 2006, Issue 10. Retrieved on 2008-08-12.
9. ↑ "Where We Work"
10. ↑ "Piloting Index-Based Livestock Insurance in Mongolia."