Index-based insurance against weather extremes in Mongolia

Veronika Bertram-Hümmer of the German Institute for Economic Research, Berlin, Germany, aimed to identify the determinants of index-insurance uptake before the harsh winter in Mongolia in 2009-2010 to discover whether index-insurance payouts enhanced household recovery following the disaster.

V. Bertram-Hümmer

V. Bertram-Hümmer

Introduction

Weather extremes are frequently detrimental for household well-being, in particular in developing countries with populations that depend on agriculture. A novel way to prepare for weather disasters are index-based insurance schemes that pool the risk among a large group of households and distribute payouts depending on the regional occurrence of extreme weather [1]. As one case in point demonstrated, herding households in Mongolia had the opportunity to insure their livestock through Index-Based Livestock Insurance (IBLI) against the risk of very harsh winters, so-called dzud disasters. When a dzud happens, households receive insurance payouts depending on the regional livestock losses [2]. The 2009-2010 dzud led to the death of a quarter of Mongolia's livestock and was the first weather disaster to trigger insurance payouts [3]. This study identifies the key factors underlying insurance uptake to identify whether index-based insurance payouts helped herding households recover from disaster losses.

Methodology

The study on index-insurance uptake and post-disaster effects exploits a socioeconomic household survey by the German Institute for Economic Research (DIW) that is designed to analyze the impacts of the 2009-2010 dzud. Based on theoretical considerations, the driving factors behind the index-insurance purchase decision are analyzed within a multivariate estimation framework. The determinants of index-insurance uptake are crucial inputs for identifying the effects of insurance payouts on the herders’ asset recovery using quasi-experimental methods.

Preliminary results

The study elaborates the determinants of the decision to purchase index insurance. Most importantly, herd size as a comprehensive measure of the household’s wealth and liquidity is identified as a key factor for insurance uptake. Other relevant determinants include the risk preference and financial literacy of the household head as well as community-level circumstances that reflect the covariate risk faced by the household. Based on the identified factors underlying index-insurance purchases, the study investigates the impacts of index-insurance payouts on post-disaster recovery in Mongolia and provides first empirical evidence on the micro-level impacts of an index-based insurance product.

References

[1] Barnett, BJ, Barrett, CB & Skees, JR (2008) Poverty traps and index-based risk transfer products. World Dev. 36, 1766–1785
[2] Mahul, O & Skees, J (2007) Managing agricultural risk at the country level: The case of index-based livestock insurance in Mongolia. World Bank Policy Res. Work. Pap.
[3] Fernández-Giménez, M. E., Batkhishig, B. & Batbuyan, B. (2012) Cross-boundary and cross-level dynamics increase vulnerability to severe winter disasters (dzud) in Mongolia. Glob. Environ. Change

Note

Veronika Bertram-Hümmer is a German citizen. She was funded by IIASA's German National Member Organization, and worked in the Risk, Policy and Vulnerability (RPV) Program during YSSP.

Please note these Proceedings have received limited or no review from supervisors and IIASA program directors, and the views and results expressed therein do not necessarily represent IIASA, its National Member Organizations, or other organizations supporting the work.


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Last edited: 19 August 2015

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