The encyclopedia · Finance & Accounting · Financial decision · 2010–2012
ILRI insured Kenyan pastoralists by tracking drought from satellites
Satellite data predicts herd losses, so insurance pays on an index instead of counting dead cows — cutting 25–40% of drought risk.
International Livestock Research Institute (ILRI)
The solution
Pastoralists in Northern Kenya face droughts that kill their herds, and uninsured risk is a main cause of poverty. Insurance markets are effectively absent because an insurer would have to verify losses herd by herd across a vast, remote rangeland.
ILRI designed Index-Based Livestock Insurance (IBLI), a contract whose payout triggers on a predicted area-average livestock mortality index. The index is built statistically from longitudinal household herd-mortality records fitted to remotely sensed vegetation data, so a satellite reading stands in for on-the-ground loss assessment.
Household-level performance analysis based on simulations finds that IBLI removes 25–40 percent of total livestock mortality risk. The paper also describes contract pricing and the underwriter's risk exposures, establishing that the product can be reinsured on international markets.
Why it worked
- Verifying individual herder losses was the barrier, and the index removes that cost entirely.
- Satellite vegetation data is observable, timely and hard to manipulate.
- Paying everyone in a zone on the same trigger keeps administration simple and trust high.
- A contract that can be priced and reinsured attracts underwriters where none existed.
What can be applied
If losses are too costly to verify individually, find an observable proxy for the loss and pay everyone on it — you trade per-case accuracy for a product that can be priced and reinsured.
Aftermath
The pilot ran with insurers in northern Kenya and established that the contract could be priced and reinsured internationally. Index-based livestock insurance has since spread as a tool for drought-prone pastoral systems in the region.
Sources
- Designing Index-Based Livestock Insurance for Managing Asset Risk in Northern Kenya
- Insuring Against Drought-Related Livestock Mortality: Piloting Index Based Livestock Insurance in Northern Kenya
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