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Insuring livestock to protect the poor

Livestock insurance has the potential to reduce the vulnerability of poor populations. The challenges are formidable, but recent technology offers hope.

Feature | 12 October 2012
GENEVA (ILO News) – Livestock supports the livelihoods of one billion poor people around the world. For many, it is a way to emerge from poverty, but one fraught with risk.

Recent innovations have fuelled interest in the potential of insurance to reduce this vulnerability.

Despite early failures, technological improvements and growing demand offer hope for “commercially viable and welfare enhancing livestock insurance”, according to Protecting the poor A Microinsurance Compendium Volume 2 , co-published by the ILO and the Munich Re Foundation.

Animal death is the biggest risk for poor cattle owners, particularly in drought-prone areas where water and fodder shortages are a major threat.

Animals are often the most valuable asset of impoverished households, and their deaths can have disastrous consequences. If the animal has been purchased through a loan, the household may have a debt on an asset it no longer owns.

Livestock mortality due to starvation and disease has been the most common type of insurance, but there are only a few livestock insurance schemes in developing countries.

The potential is huge but market penetration remains very low, suggesting that livestock insurance is either too expensive or not meeting clients’ needs.

Challenging fraud

The challenges are formidable.

For starters, potential clients often have little or no experience of insurance and do not understand its benefits.

“While livestock insurance is a very obvious need among low-income livestock owners, this doesn’t always translate into demand,” says Pranav Prashad, of the ILO’s Microinsurance Innovation Facility. “Raising awareness and understanding is a big challenge.”

Fraud is another major hurdle.

In parts of India, for example, the high mortality rates of animals reported, have prompted fears amongst insurers that a substantial portion of livestock insurance claims are fraudulent.

As a result, insurers resort to tighter controls, which not only increase the cost of premiums but also make it more difficult to comply, discouraging potential clients.

In order to prevent fraud, insurers need to know what animals they are insuring and be able to establish their whereabouts, which is difficult in remote rural areas.

Promising innovations

India’s IFFCO-Tokio insurance company has been testing the use of Radio Frequency Identification (RFID) technology to help prevent fraud. Data contained in a microchip injected under the skin of the animal can be accessed through a reader. When a client reports the death of a cow, an insurance official verifies that the RFID reading coincides with the identification number on the policy.

The pilot project showed strong acceptance of the technology by clients, “but not by bank staff and veterinarians as it is no longer possible for them to make fraudulent claims,” the compendium says.

Another promising innovation is index-based insurance, where payments to clients within a specific area are triggered by an external indicator. In Mongolia, a pilot livestock insurance scheme covers losses caused by extreme winter conditions. A similar project in the Marsabit area of Kenya uses an index of forage availability, based on satellite imagery.

The report warns, however, that index-based livestock insurance may only be effective in semi-arid areas, and that it remains unclear whether it can function without subsidies.

But the report remains upbeat.

“Even where subsidies may be necessary, the case for subsidized livestock insurance as a productive safety net to facilitate the entry of the poor into livestock production and marketing could be compelling.”