The IBLI contract appears most effective in protecting households from more extreme covariate livestock mortality losses, which are effectively uninsured under existing informal risk management mechanisms (Lybbert et al.
The actuarially fair premium of IBLI contracts can be calculated by taking an expectation of the indemnity payment function (3) per insured TLU over the historical (burn rate approach), estimated or simulated distribution of the underlying NDVI data.
Given marketing and political considerations, it is unclear whether insurers will be willing to vary IBLI premia in response to changing ex ante range conditions, leaving open a real possibility of intertemporal adverse selection with respect to the actual product offered.
IBLI to provide covariate asset risk insurance can effectively address the uninsured risk problem faced by pastoralists only if underwriters can manage the covariate risk effectively, perhaps through reinsurance markets or securitization of risk exposure (e.
For contracts with unconditional (conditional) premia, actuarially fair stop-loss reinsurance rates quoted as percentage of IBLI premium would range from 49-68 percent (32-49 percent) for 10-30 percent strike contracts and with the rates of 53 percent (35 percent) for the piloted 15 percent strike contract (Table A3 in the Appendix).
This article has laid out why IBLI is attractive as a means to fill an important void in the risk management instruments available to pastoralists in the arid and semiarid lands of East Africa.
The development of the IBLI contract opens up the opportunity to deliver commercially sustainable insurance in a place where uninsured risk remains a main driver of persistent poverty.
2010) explore this issue in some detail for this IBLI product.
In the Northern Kenya IBLI case described here, our commercial partners can tap into a network of local agents equipped with electronic, solar rechargeable point-of-sale (POS) devices being extended throughout Northern Kenya by a commercial bank working with the central government and donors on a new cash transfer program.
Fourth, as already mentioned, IBLI underwriters and their commercial partners must make difficult choices in balancing the administrative simplicity and marketing appeal of offering IBLI contracts priced uniformly over space and time (which we termed "unconditional" pricing in the preceding analysis) versus more complex ("conditional") pricing to guard against the possibility of spatial or intertemporal adverse selection.
These implementation challenges notwithstanding, IBLI shows considerable promise in the pastoral areas of East Africa.