Tuesday, February 9, 2010

Pastoralist Rain Insurance

In one of the case studies for my food policy book, Hazell discusses the difficulties of providing insurance for migratory pastoralists in eastern Africa. Among the primary difficulties are that the risk is highly covariate - if it hits one person in an area, it hits them all - making it difficult for private insurers to function without risking going under; and there are serious moral hazard problems involved in public insurance - there's not enough incentive to take precautions to avoid environmental or disease damage, for instance, increasing the cost of the program to the public.

So the idea has been floating around for some time (and in the case study) to set up an insurance scheme not based on livestock deaths, but on rainfall or grass production. ILRI, the International Livestock Research Institute, started up an initiative to do just that in Northern Kenya just a couple weeks ago. Here is their video about it:

Jan de Leeuw, one of ILRI's researchers, was visiting Cornell today, so I got to speak with him a little about it. While it's not his team's project, he mentioned that they are working through a local insurance company with an international re-insurer to protect the local company.

Among the interesting things to study in the months and years ahead during this project that we talked about was understanding whether people who buy the insurance increase the size of their herds (because the downside risk of losing them is lower) or decrease the size of their herds (because they aren't as needed for precautionary savings), and what the non-insured do. If insured people decrease the size of their herds, it might encourage the non-insured to increase the size of theirs, keeping up the potential for tragedies of the commons. We'll keep our fingers crossed.

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