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Insuring the Uninsured

  • OIC’s new Index Based Livestock Insurance for Borena pastoralists

Oromia Insurance Company (OIC) has recently launched a new product dubbed Index Based Livestock Insurance (IBLI) for pastoralists in Borena Zone, Oromia National Regional State. For farmers and pastoralists in Ethiopia’s drought vulnerable zone, the launching of IBLI is very good news.

Borena has been affected by drought recurrently over the past couple of years. According to the United Nations Office for the Coordination of Humanitarian Affairs, in 2010 and 11, drought in Borena caused serious damage to the rich livestock resources of the region. As a result 412,000 out of a total of 1.29 million people in the region were receiving food assistance including aid provided under the Productive Safety Net Programme.

Whenever drought hits the area, forage crop and water availability are seriously affected making survival of livestock in the area difficult. As a result pastoralists, whose livelihoods depend mainly on livestock resources, lose much of their herds during drought seasons.

This sustains the cycle of poverty in the area, further casting a shadow over their hope of a better future. It is to such people that OIC now brings a new of its kind insurance service, bringing subscribers relief.

If satellite pictures taken show that there is shortage of forage, then the pastoralists will be eligible to claim 50 per cent of the value of their animal in the first half of the year and the remaining in the second half if the drought continues throughout the year.

“Now I feel safe”, a pastoralist in the area who subscribed to the service told a local radio journalist while the program was launched.

According to Megerssa Miressa, Head of Micro Insurance Department at OIC, the new insurance policy insures forage availability.

This means, if there is drought in the area, which will be confirmed based on satellite pictures taken by the National Aeronautics and Space Administration (NASA), America’s responsible agency for civilian space program and for aeronautics and aerospace research, then the company will compensate the farmers for every head of an animal to which a premium has been paid. The satellite picture will be interpreted by experts at Cornel University and the International Livestock Research Institute (ILRI). Not only that, confirmation will be given by the Ethiopian Mapping and Meteorological Agencies respectively.

“If readings of the data show that the area has been affected by drought and thus forage availability is not sufficient, then, whether animals have died or not, the pastoralists will be eligible for compensation”, Megersa told Ethiopian Business Review.

OIC has first studied NASA’s 30 years satellite data of the Borena Zone before launching the new service.

The study, which was done by ILRI, has helped OIC to obtain a real picture of the zone’s climate variation” Tilahun Tadesse, Strategic Planning and Marketing Manager at OIC said.

Borrena Zone Map

ILRI also offer wide ranging services in the product design stage. Similarly Cornel University, in the United States, was engaged in this process. ILRI’s technical support will continue for the next three years as OIC has already inked an agreement for it.

OIC initiated the idea of launching IBLI when it learned about its success story at the sixth International Microinsurance Conference held From 9 to 11 November 2010 in Manila, Philippines. In the conference that brought together 520 participants from 50 countries, Northern Kenya’s Marsabit District was raised as a successful region in IBLI. It was in that conference that Mitiku Abdissa, then OIC’s General Manager who was attending the conference, approached the leadership of ILRI to extend the project to Borena Pastoralists.

Borena, a drought prone arid and semi-arid Zone in Oromia Region, is found in southern Ethiopia bordering Kenya. The Zone has similar climate with Northern Kenya. As a result it was easy to extend the project.

Once the conference was concluded, OIC and ILRI agreed to work out the details of the project together. ILRI then pursued comprehensive research aimed at designing, developing and implementing market mediated index-based insurance products for the zone.

The initiative then culminated in launching a workshop on adapting IBLI for Ethiopia on July 12/2010 in Addis Ababa. In the workshop, Christopher B. Barrett, Professor of Applied Economics and Management and International Professor of Agriculture, at Cornell University made presentation on developing Index Based Livestock Insurance to reduce vulnerability due to drought-related livestock deaths in Ethiopia. The Professor further participated in other subsequent discussions to fine-tune the project. The design of the insurance product with the management team of OIC and experts at ILRI was also done by further incorporating experts from the University of Bergamo in Italy and the Chrisitian-Albrechts-Universität zu Kiel in Germany.

According to Prof. Christopher Barrett, who is also Director of Food System and Poverty Reduction at Cornel, index based insurance avoids problems that make individual insurance unprofitable for small, remote clients. This is because the system does not involve transaction costs of measuring individual losses, preserving effort incentives as no single individual can influence index. Furthermore adverse selection does not matter as payouts do not depend on the risk incurred by those who purchase the insurance policy. The services are also available on a near real-time basis, making it faster for clients to receive a response.

As OIC has been promoting these merits of the new product, pastoralists in eight districts of Borena have started subscribing to the insurance coverage. OIC plans to further this to the neighbouring zone of Gujji and the Somali National Region State.

From left to right, Tesfaye Desta, General Manager of OCI dressed in the traditional clothing of Borena, Abebe Welde, Oromiya Pastoralist Area Development Commission Commissioner, Christopher B.Baret (Prof.) from Cornel University and representative of ILRI attending the launching of IBLI in Yabelo, Borena Zone.

Pastoralists pay a 15 per cent premium fee for their animals which are valued 15,000, 5,000 and 700 birr for camel, cattle and sheep/goat respectively per annum per head to get the insurance coverage. Accordingly, if satellite pictures taken show that there is shortage of forage, then the pastoralists will be eligible to claim 50 per cent of the value of their animal in the first half of the year and the remaining in the second half if the drought continues throughout the year.

As of September 25, the premium the company has collected for the services from over 200 pastoralists has surpassed 215,000 birr.

Many livestock keepers in the Zone who subscribe the service hope that the new insurance policy will protect them from the recurrent drought related asset losses they face.

Borena is at the center of the 2011 horn of Africa crisis. Figures compiled by the British Department for International Development (DfID) suggest that between 50,000 and 100,000 people, more than half of them children under five, died in the crisis that affected Somalia, Ethiopia and Kenya.

The US government estimates separately that more than 29,000 children under five died from May to July 2011 in the three countries. The accompanying destruction of livelihoods, livestock and local market systems affected 13 million people.

Pastoralists in the Horn of Africa face huge loss of animals by the time the international community mobilizes humanitarian assistance. This is because the mobilization work usually takes a long time. That is why pundits consider IBLI a promising option for putting risk-based poverty traps behind.

The new insurance service of OIC will perhaps be a timely solution to reduce the risk of pastoralists in the region. Experts such as Yonathan Shiferaw, Programme Associate for Disaster Risk Reduction and Livelihoods Recovery Programme with the Disaster Prevention and Preparedness Agency (DPPA), share this view. However, Yonathan said, it is advisable if the company [OIC] issues voucher for the pastoralists to buy forage from suppliers and keep their animals alive rather than giving the payouts in cash.

OIC started micro insurance service in December 2009. The service grew to include multi-peril crop insurance in the 2010/11 fiscal year with five farmers’ cooperatives. IBLI is just another micro insurance product that OIC launched to further address insurance coverage for unreached clients.

Although its formation period dates back February 2008, Oromia Insurance Company S.C was legally established in January 2009. As of June 30, 2011 the Company has 545 shareholders with a subscribed capital of just barely over 85 million birr and paid up capital of nearly 29.135 million birr. A distinctive feature of the company is that over 1.3 million farmers in Oromia have become shareholders through cooperative unions in the region.