Subsidies for index-based insurance are widely used across developing countries to protect farmers from increasingly frequent extreme weather events.
Supported by the Jameel Observatory and others, Xandru Cassar recently completed a Master of Science in Development Practice at Trinity College Dublin in which he assessed subsidies for Index-Based Livestock Insurance in Ethiopia, evaluating their aims as perceived by key stakeholders, the implication of their design, and exogenous factors which influence their effectiveness.
Since livestock and livestock insurance are central to the economies of dryland communities, we caught up with Andrew to better understand the significance of his research.
What is the underlying rationale for livestock insurance subsidy programmes [in general] in drylands and what was the fundamental ‘problem’ or question you wanted to address through your research?
There are multiple reasons why livestock insurance might be subsidised, but to date there has been very limited research articulating and discussing the motivations of those actually engaged in insurance subsidies (one notable exception being Johnson et al, 2019). My study sought to shed light on this understudied aspect.
Three overarching rationales emerged from the interviews I conducted with pastoralists and key informants from NGOs, government bodies, insurance companies, researchers, and programme donors.
The first, and most intuitive, is to leverage subsidies as a means of heightening awareness about livestock insurance and augmenting updated levels in the longer term — bearing in mind that such risk-reduction products are new and unfamiliar among many dryland communities in East Africa.
Second, subsidies were regarded by many interviewees as a necessary means of supporting the commercial viability of livestock insurance. Without them, the rationale went, companies would not enter the market, and pastoralists would be deprived of an important form of risk reduction.
The third aim was to improve the inclusion of potentially marginalised groups, such as disadvantaged individuals or households who may not afford insurance premia, or harder-to-reach communities who might otherwise be underserved.
Understanding these different rationales is valuable because it allows for the design of subsidy programmes in ways that maximise the intended outcomes—whether that be increasing awareness, improving inclusion, or a mix of the two. This brings me to the second part—the more quantitative part—of my research, through which I studied the impact of subsidy design on insurance uptake.
The ultimate goal? To inform the design of such subsidy programmes, to improve their effectiveness both in terms of impact-per-dollar as well as outcomes attained.
Index based livestock insurance seems like a proven approach that’s being scaled in various locations. What are the key strengths and drawbacks you observe from this approach?
Index based livestock insurance is incredibly innovative in its ability to pre-emptively and quickly enable pastoralists to protect their livestock and maintain their livelihoods when drought is at hand. As climate change continues to threaten the well-being of pastoralist communities in East Africa and beyond, tools like this are essential for preserving their dignity and resilience.
However, challenges remain, and drawbacks do exist. Basis risk – the possibility that the index doesn’t quite capture actual conditions on the ground – is a recurring issue, but one that is almost impossible to eliminate. On the other hand, there is scope for further improvements in the design of insurance products – not just in the case of livestock insurance but for index based agricultural insurance more broadly. Consistent, regulatory-established minimum standards are still lacking (see Jensen & Barrett, 2017).
There is also much to be learnt in terms of getting the design of subsidies right – and it is here that I hope this research can contribute. It is clear that poorly design subsidy programmes risk undermining the intended impacts of livestock insurance and harming the long-term sustainability of what could be an effective risk reduction mechanism. Finally, the last mile of insurance payouts remains an issue, as pastoralists often need to travel to a given location to collect the payout. The advent of mobile money is already alleviating this challenge though, and the hope is that this trend will accelerate in the years to come.
Some people say that risk insurance programmes of these types tend to reach the better off livestock keepers in drylands, missing the poorest and most vulnerable who have few assets to insure. What does your research say about this?
This was somewhat of a recurring theme in interviews and discussions with participants and colleagues. My research does indeed lend credence to this belief, in that households with livestock wealth above the 95th percentile are more responsive to insurance subsidies. However, it’s important to qualify this: among the rest of the population, the impact of subsidies is relatively homogeneous, and less wealthy households are no less responsive to subsidies than the average household—if anything, they may benefit more. This suggests that identifying and excluding the wealthiest households may be sufficient to ensure the inclusion of disadvantaged groups, though more research would be greatly beneficial.
In a similar vein, results suggest that subsidies do not inherently favour male-headed households, with there being evidence of considerable levels of women’s participation in recent subsidy schemes. Nonetheless, there is clearly a need for further research on intrahousehold dynamics relating to acquiring and benefiting from livestock insurance. Some studies suggest significant differences in how costs and benefits are distributed within pastoralist households, which could have important implications for subsidy programme design.
Your research was carried out through Trocaire and TCD, with support by the Jameel Observatory. What form did the Observatory’s support take and how did it contribute to your research?
I remain incredibly grateful for the Jameel Observatory’s support for this work. The financial support allowed me to undertake fieldwork in Southern Ethiopia – specifically Borana and Dassanach – which was crucial in ground-truthing and contextualising econometric results and ensuring that pastoralist communities perspectives and priorities were reflected in the work. The JO also facilitated access to secondary data collected as part of previous research efforts, which underpinned the quantitative aspects of my study.
Moreover, I had the privilege of working with Dr Nathan Jensen (who supervised my research and offer invaluable guidance and support), Prof Alan Duncan and many other staff at the Jameel Observatory, as well as being able to present my research to the Observatory’s early-career researcher group, which was an incredibly enriching experience.
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Pastoralist receive an indemnity payment after livestock losses; Index Based Livestock Insurance Program (IBLI) held an indemnity payout ceremony in Moyale, Ethiopia (photo credit: ILRI/Apollo Habtamu)