Transcript Mongolia Livestock Insurance Indemnity Pool

World Bank Catastrophe Risk Financing Seminar
Washington DC October 27, 2005
World Bank Group
Mongolia Livestock
Insurance Indemnity Pool
Olivier Mahul
Senior Insurance Specialist
Financial Sector Operations and Policy Department
Country Agricultural Risk Management
Agri-business segmentation
Institutional capacity building
Social vs commercial insurance
Data management
Regulatory/supervisory framework
Information and education
Technical expertise
Agricultural Risk Financing
Risk layering
Insurance index
Insurance pool
Insurance and rural finance
World Bank Group
Country
Agricultural Risk
Management
Traditional farming sector
Emerging farming sector
Commercial farming sector
Agricultural risk assessment
Probabilistic catastrophic risk
model
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National agricultural insurance pools
may be a potential way forward
Government
Structured Relief
International
Donors
Development
Banks
Government Capital
Support
World Bank Group
Int’l capital and
reinsurance markets
Agricultural
Insurance Pool
Domestic Insurance
Companies
Rural Banks/MFIs
Farmers/Herders
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Action Plan
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World Bank Group
Information and education
 Reduce widespread lack of insurance culture
Enabling legal framework
 Provide incentives for selling and purchasing agriculture
insurance
Institutional structure
 Define the role of each stakeholder (farmers’ groups,
government, domestic insurance industry, international
reinsurance industry,, etc.)
Data management
 Build an efficient data management system
Technical expertise
 Contract design, rate making
Financial capacity
 International markets, governments as reinsurers of last
resort, etc.
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Livestock Insurance in Mongolia
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23 million heads (83% sheep and goat)
About USD 1 billion of value
Liv e stock losse s in M ongolia
20.00%
15.00%
10.00%
5.00%
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
0.00%
1975
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1973
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The animal husbandry in Mongolia represents 87% of agricultural GDP
and 30% of total GDP
11 million animals lost in 2001-2002 due to severe weather conditions
(dzud)
Livestock size in 2003:
1971
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World Bank Group
year
% 2002 GDP
% livestock value
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Index Based Livestock Insurance
Project Description
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World Bank Group
Request from the Government of Mongolia
 The development of livestock sector is a priority
 Livestock exposure to catastrophic events (dzuds)
Rationale for Bank involvement
 Global experience of innovative approaches to insurance for
catastrophic events and index-based insurance
 Complements the ongoing Sustainable Livelihood Project
Lending operation
 3 year pilot program
 IDA Specific Investment Loan of US$7.75 million approved in
May 2005
 Contingent debt facility of US$5 million
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Index Based Livestock Insurance
Objectives
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Affordable and effective insurance
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Simple and stable structure for implementation in the short
run that allows for flexibility in the future
Ring fence livestock insurance business
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Provide affordable and effective livestock insurance to all
herders on a voluntary basis
Flexible institutional structure
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World Bank Group
Insulate the domestic insurance industry from catastrophic
livestock losses
Ensure timely, full indemnity payments (no default risk)
Foundation consistent with the new regulatory
environment
Limit government financial exposure
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Insurance Index Selection
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Individual livestock insurance
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Impossible to know who owns which animals
Moral hazard, adverse selection, high administrative costs
Weather insurance
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World Bank Group
Incomplete and unreliable historical weather data
Complex relationship between weather events (dzuds) and
livestock mortality
Index-based mortality insurance
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Detailed annual animal census (by sums and species)
Adult animal mortality data organized and audited every year
34 years of data
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Livestock Risk Layering
World Bank Group
100% mortality
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Disaster Response
Product
DRP : Social insurance
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30% mortality
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BIP : Commercial insurance
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Base Insurance Product
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Retained by
Herders and Banks
10% mortality
Monetary compensation in case of
extreme catastrophic events
Herders pay small fee
Funded by GoM and donors
Voluntary participation
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Sold by approved commercial insurers
Regulated by GoM
Herders pay a commercial insurance
premium
Voluntary participation
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Livestock Risk Financing
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Objectives of Financing structure
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World Bank Group
Protection of insurance companies for too much exposure
when selling BIP
Protection of other lines of business
Protection of herder premiums
Assurance that all indemnity payment are paid in full
Livestock Insurance Indemnity Pool
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Contractual arrangement between the participating
insurance companies and the Government
Pre-paid indemnity pool
Compulsory unlimited reinsurance provided by the
Government at fair price
Incentives for insurers to collaborate
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Livestock Insurance Indemnity Pool
World Bank Group
Loss frequency
3-5%
Disaster Response
Product
Government
reinsurance
stop loss
Base Insurance
Product
Livestock
Insurance
Indemnity
Pool
World Bank
Contingent
Debt Facility
Reinsurance
premiums
Herders’
insurance
premiums net
of reins. prem.
GIC
15-20%
Herders’ selfretention
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Livestock Insurance Indemnity Pool
World Bank Group
WB Credit
or GoM Resources
DRP
&
BIP
DRP fees
DRP Reserve
DRP
DRP
Reinsurance
premiums
BIP
BIP
Reserve
Reserve
LIIP
LIIP
Risk -loaded
premium
paid
into LIIP
Risk -loaded
Account
Account
Equal to
Equal to
BIP
BIP
premium
105% of
105% of
risk - loaded
risk - loaded
BIP
premium
Insurers
paid
GIC
Insurers’ GIC
BIP
premium
Insurers’ GIC
into LIIP
March
t
April - June
August
July
t+1
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Livestock Insurance Indemnity Pool
World Bank Group
Small and medium collective insured losses
Unlimited
stop loss
Insurers’ profit
LIIP
reserves
Insured losses
Large collective insured losses
Unlimited
stop loss
LIIP
reserves
Insured losses
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Pilot Aimags
World Bank Group
Key objectives
Uvs
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Khenti
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Bayankhongor
Bayankhongor
Khentii
Uvs
# animals
1.2 mm
1.4 mm
1.5 mm
Value at risk (US$)
33.5 mm
55.3 mm
43.8 mm
Average AL (% VaR)
5.7%
4.7%
5.1%
Std AL (% VaR)
7.1%
3.3%
3.3%
Test the product
design
Learn if herders
will buy the
insurance
Learn if insurance
companies have
an interest in
selling and the
capacity to
manage this
unique insurance
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IBLI: Risk financing strategy
World Bank Group
LIIP net position
Probability exceedance curve
100%
80%
60%
BIP reserve - ne t positi on
Probability exceedance curve
40%
100%
20%
95%
0%
0
50,000
Financing from the World Bank Contingent Credi t Facility
90%
150,000
200,000
250,000
Probabilit
y Exceedance
Curve
100,000
85%
US$
40%
80%
35%
75%
30%
-220,000
25%
-170,00020%
-120,000
-70,000
70%
-20,000
30,000
80,000
US$
15%
10%
5%
0%
0
200,000
400,000 600,000
800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000 2,000,000
US$
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Long Run Transition
World Bank Group
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Transition out of pilot phase is subject to pilot
performance
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Greater market integration
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Move towards commercial reinsurance
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Increase responsibilities of insurance companies
and government regulatory agency
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Integration with microfinance and NGO initiatives
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Challenges for Long Term Sustainability
World Bank Group
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Creating effective rules and regulations
Strengthening insurance industry
Strengthening insurance supervision
Accessing the global reinsurance market
Linking premium rates to stocking rates
Improving the quality and verification of the official livestock
statistics
Educating stakeholders: herders, insurance companies,
government
Creating incentives for the insurance market to sell, service, and
share risk in Mongolian livestock insurance
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World Bank Group
Thank you for your attention
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