Innovations Explored: How insurance protects pastoralists in Kenya

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Financial Inclusion

Innovations Explored: How insurance protects pastoralists in Kenya

Photo: Courtesy Mercy Corps.

This post is part of a Global Envision series called "Innovations Explored" - visiting three Mercy Corps programs that are taking a new look at entrenched problems. Find the other two below.

An unconventional insurance program developed by Mercy Corps is helping pastoralists in Kenya preserve their way of life, despite the threat of annual drought and the associated loss of livestock. Because of its innovative design, the insurance encourages positive drought mitigation techniques and is profitable for the insurer.

The Problem
Drought is becoming more frequent in Kenya, particularly in the county of Wajir, and herders who depend on the arid land for grazing their livestock are extremely vulnerable. One bad year could destroy the pastoralists’ fragile lifestyle, and erode their ability to recover during the following season. Many pastoralists, especially those with smaller herds, are forced to abandon their way of life to find new means of earning income.

Mercy Corps’ Kenya team realized that pastoralists needed a way to temper the volatility of their income streams and safeguard them against total loss. Typically, insurance would perform this function by transferring risk over time—that is, by smoothing losses evenly across the whole drought cycle. However, conventional insurance wasn’t the answer. Pastoralists often only want to purchase insurance when they recognize risks are higher, like in a drought year. That same risk, however, makes insurance providers more reluctant to take them on as clients. In addition, assessing individual losses in rural areas to pay out insurance claims is difficult and expensive.

Not only that, but traditional insurance would likely only make a payout if the herder's animals had died--valuable, but a case of "too little, too late."

The Solution
To create a customized, private sector-provided insurance just for herders, the Kenya team brokered a partnership between Takaful, a Kenyan insurance company, and the International Livestock Research Institute to introduce index-based livestock insurance.

Rather than basing insurance payouts on the actual number of livestock lost, the new livestock insurance uses satellite images and historical weather data to predict how many animals could die, and bases the payouts on those predictions. Because herders don’t have to wait until animals have died, they can use the money to sustain their herd, like by paying for food and vet bills, or even to start a small side business to support themselves.

In other words, with this transparent, cost-effective system, the insurance actually encourages and rewards pastoralists who use good production practices and employ drought mitigation strategies.

Mercy Corps worked in partnership with Takaful to roll out a marketing campaign and train community-based sales agents for the local launch of the insurance in Wajir. The Wajir pastoralists had little experience with insurance and needed extensive community dialogue to understand how the product might benefit them. Another challenge was ensuring that the program complied with sharia laws, thereby meeting the needs of the majority Muslim pastoralist population. This was made possible by Takaful, which applied Islamic banking principles in the design of the product.

The Impact
Initial testing of the young program has shown it’s on track for success. During the first enrollment window in August and September 2013, pastoralists in Wajir purchased insurance to cover more than 2,040 animals. The coverage, worth $86,220, was enough to provide an effective safety net as they entered the next season.

The first much-needed insurance payout occurred in this past year’s dry season, and Mercy Corps found that families who had received a payout were 33 percent less dependent on food aid. Households that received payouts were able to re-invest in livestock and diversify into other livelihood activities. Pastoralists forced out of herding can also use the drought-related payouts as a parachute fund to ensure a managed exit from tending livestock and to ease the transition to a more viable job.

The Mercy Corps Kenya team is using feedback from pastoralists to develop better marketing and communications strategies to reach more pastoralists and increase sales of the insurance. Early discussions indicate there is interest in scaling the program through publicly-funded safety nets. Local governments and members of parliament from pastoral areas are in the process of designating a portion of their budgets for livestock insurance. The initial success of the Wajir project also provides a rich learning experience to support the program’s replication elsewhere in Kenya and in other livestock-dependent countries.

Not only could this private sector-led approach significantly buffer the impact of the drought-related shocks pastoralist communities face, but the model also boosts the insurance company’s bottom line. What does this mean? The impact will be sustained even once aid organizations like Mercy Corps have withdrawn.

Read more about the project from the International Livestock Research Institute
 

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