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PROJECT INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Project Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Environment Category
Safeguard Classification
Date PID Prepared
Estimated Date of
Appraisal Authorization
Estimated Date of Board
Approval
Report No.: AB1024
MN-Index-Based Livestock Insurance Project
EAST ASIA AND PACIFIC
General agriculture, fishing and forestry sector (50%); Noncompulsory pensions, insurance and contractual savings (50%)
P088816
Government of Mongolia
Ministry of Finance and Economy
[ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined)
[ ] S1 [ ] S2 [X] S3 [ ] SF [ ] TBD (to be determined)
July 13, 2004
January 19, 2005
April 7, 2005
1. Key development issues and rationale for Bank involvement
The agricultural sector plays a central role in the Mongolian economy, contributing around one
third of national GDP. The most important agricultural activity is livestock husbandry, which has
an 87% share of agricultural GDP and supports at least half the population. Livestock provides
an important source of income, jobs and food security, and a means for households to invest and
store their wealth. However, the country is prone to regular extreme climatic events that can
cause high rates of livestock mortality, jeopardizing rural livelihoods. In particular, the frequent
droughts and severe winters (known as dzuds) can devastate herd numbers. During the period
between 1999 and 2002, one third of the national herd was lost in successive dzuds.
The importance of livestock to the livelihoods of poor rural households has increased in recent
years with the shift from collectivized farming to family-based herding during the 1990s. As a
result of economic restructuring, the number of herding families doubled from 1990-1997, and
Mongolia’s overall herd size increased from 25 to 31 million, increasing the pressure on grazing
resources.
With the intensification of livestock production and increasing pressure on pasturelands, the
Government of Mongolia, with support from donors, is responding and intends to launch a broad
program of sectoral reform, including lifting restrictions on private land ownership, coupled with
increased investment in rural infrastructure and services. An important thrust of government and
donor intervention is the support of pastoral risk management (PRM), such as under the on-going
IDA-funded Sustainable Livelihoods Project (SLP), which encompasses a package of initiatives
including participatory grazing and pasture management, support to herder self-help groups and
support to the hay and fodder enterprise development. The proposed project would have strong
linkages to the SLP and would complement other PRM activities supporting herding households
and the development of the livestock sector.
Currently there are no formal financial insurance products available to protect herding
households from the risks of catastrophic livestock mortality. Currently, the coping mechanisms
available to households are informal, which are generally insufficient to provide a dependable
safety net for households experiencing devastating livestock losses. The historical approach of
the Government has been to invest in restocking following widespread and large-scale mortality.
However, the costs of restocking are no longer financially viable, nor does it provide the right
incentives for herders. As such, market-based insurance is considered the most appropriate
alternative. The Government is highly supportive of the proposed project and highlighted this as
a key priority to donors during the Mongolia CG Meetings in November 2003 and in various
other meetings over the past six months.
The proposed project is consistent with the recently approved CAS objective of reducing rural
vulnerabilities through the development of new and strengthened systems of risk management.
The proposed project would build upon the findings of the initial ESW, which developed the
concept of index-based livestock insurance and confirmed its potential feasibility for Mongolia,
and the ongoing Sustainable Livelihoods Project.
Numerous discussions have been held over the past couple of years regarding the conceptual
design of the proposed project with private insurance companies and commercial banks which
have expressed their interest in potential participation. In addition, the project concept has been
endorsed by several donors. Discussions have been held with the ADB regarding potential
collaboration in the development of the regulatory framework for the proposed insurance scheme
and with IFAD on the implementation of the proposed pilot programs.
2. Proposed objective(s)
The development objective of the proposed project would be to ascertain the viability of indexbased livestock insurance in Mongolia. This would be achieved through the piloting of
insurance schemes in various provinces of Mongolia and the formulation of an appropriate
regulatory framework.
The proposed insurance would enhance livelihood security of livestock-owning households by
reducing their vulnerability from livestock mortality events.
3. Preliminary description
Careful consideration of what type of insurance solution may be possible and what the primary
goals of such a solution are has been central to the discussions regarding the design of the
proposed project. The insurance scheme is based on an innovative combination of self-insurance,
market-based insurance and social insurance. Herders retain small losses that do not affect the
viability of their business, while large losses are transferred to the private insurance industry and
catastrophic losses are transferred to the government.
Rationale for mortality-based insurance
Preliminary analytical work and discussions have focused on selecting the most appropriate type
of insurance for local conditions. The aim has been to identify an insurance product for
catastrophic mortality events within a region, recognizing that smaller, more localized livestock
mortality risks are better addressed through appropriate household-level risk management
mechanisms.
Three alternative approaches have been considered: (i) individual coverage to herders has been
unsuccessful in Mongolia due to moral hazard, adverse selection, high transaction costs, and a
largely immature private insurance market; (ii) weather-based insurance may be another option,
however, given the complexity of the dzud events, the meteorological system in Mongolia is
insufficient to provide the required information; whereas, (iii) index-based mortality insurance is
simpler than weather-based insurance, and is less prone to moral hazards, adverse selection and
less costly than individual insurance.
Index-based mortality insurance is not linked to the dzud event itself, but to the outcome that is
of most concern – large numbers of livestock mortality. Importantly, it provides strong
incentives to individual herders to continue to manage their herds so as to minimize the impacts
of major livestock mortality events (i.e. individual herders receive an insurance pay-out based on
regional mortality, irrespective of their individual losses). The insurance would pay out to
individual herders whenever the mortality rate in the local region exceeds a specific threshold.
Finally, a 30-year time series on adult animal mortality is available for all sums and for the five
major species of animals. Such data is critical for developing actuarial information and for
understanding the potential cost of alternative designs.
In addition, during project
implementation, consideration may be given to the utilization of other data, such as the
normalized differentiated vegetation index (NDVI), to further strengthen the design of the
scheme.
Proposed project design
The proposed project would introduce index-based mortality insurance in several aimags
(provinces) on a pilot basis. Following the implementation of the proposed project, it would be
expected that the insurance scheme would be principally implemented by private companies on a
full commercial basis. Moreover, this insurance product could be blended with other financing
instruments (i.e. savings, credit) in order to provide an integrated risk financing strategy to the
herders. The key components of the proposed project would be as follows:
i)
Implementation and refinement of pilots. based upon risk assessments, alternative index
products will be evaluated and implemented during the life of the pilot. Adjustments will
be made based upon market assessments and pragmatic concerns to create relatively
simple and easily understood insurance products. Throughout the life of the pilot,
modifications will be made based upon research and feedback from end-users to design
the most appropriate.
ii)
Establishing the Necessary Institutional Infrastructure: while there is experience with
index-based insurance for crops (most notably in the U.S.), applying this approach to
livestock is new. Therefore, various activities must be supported to establish the
necessary institutional infrastructure for the implementation and management of the
scheme, including: strengthening the capacity for collecting, auditing, and analyzing
relevant data, and serving insurance products (e.g. delivery).
iii)
Regulatory Framework: following the new Law on insurance adopted in April 2004, the
regulatory and supervisory framework needs to be developed, including: establishing
requirements for participating financial institutions, and supporting the preparation of
livestock insurance legislation.
iv)
Catastrophic risk hedging mechanism: it is envisaged that support will be provided for
the establishment of a contingent debt facility to provide the necessary financial backing
for the scheme until such time as it can become self-supporting.
v)
Promotion/Public Awareness: a wide range of stakeholders must be educated on the
products that would be offered under the proposed scheme, which include: herders,
government officials, insurance companies, banks and other microfinance institutions,
herder groups, NGOs and donor organizations.
4. Safeguard policies that might apply
No safeguard policies are expected to be triggered by the proposed project.
5. Tentative financing
Source:
BORROWER/RECIPIENT
INTERNATIONAL DEVELOPMENT ASSOCIATION
OTHER SOURCES (TO BE CONFIRMED)
Total
6. Contact point
Contact: Nathan M. Belete
Title: Rural Development Economist
Tel: (202) 473-5397
Fax: (202) 477-2733
Email: [email protected]
($m.)
0.25
5.00
1.75
7.00