Perhaps the most innovative component of Mongolia’s insurance sector is a recently launched livestock management policy. The Index-based Livestock Insurance Project (IBLIP), which is specifically tailored to the country’s unique needs and extreme environment, is among the first of its kind to be put into practice. Under IBLIP, indexed insurance is used to cover livestock instead of applications like agricultural yields or weather risks.

A successful pilot version of the livestock insurance project ran from 2006 to 2009, and it is now being expanded to offer nationwide coverage. IBLIP is currently managed by a large group of local and international players, including private sector insurers, the government and donor organisations.

AN IMPORTANT ISSUE: Livestock losses are a major concern in Mongolia. Animal husbandry accounts for approximately 80% of all activity in the agriculture sector, which itself makes up about a third of GDP and employs approximately 45% of the national workforce. Colder-than-normal winters, called dzud in Mongolian, can lead to mass deaths among species such as horses, goats, yak, camel, cattle and sheep. In the worst dzud since record keeping began, some 8m animals died in 1944, representing a third of the national stock.

In recent years dzud-related livestock losses have become a semi-regular event. In 2010 around 10.7m animals perished, which was the greatest loss by volume on record, and constituted 22% of total stock. Several seasons of smaller losses can also have an impact, herders are learning – in the winters of 1999, 2001 and 2002 combined, for example, some 11m animals died.

GERS: For nomadic herders, whose main measure of wealth is the number of animals they own, a bad dzud can be devastating to the herders and their long-term livelihoods. Those who see entire herds wiped out often find themselves pitching their felt tents, or gers, outside Ulaanbaatar or other smaller cities, left with little choice but to look for urban work.

CHANGING CONDITIONS: Two factors explain the increase in dzud-like conditions. The first is climate change, according to Ya. Ulziibold, the project leader for livestock insurance at Bodi Daatgal, a Mongolian insurance company. Weather patterns are changing and extreme conditions are more common.

The other dynamic is the increase in the number of animals herders own, a consequence of the shift in 1990 from a centrally planned socialist economy to a free market. During the socialist era animals were owned by government and entrusted to herders for management. Decisions about numbers were centrally controlled.

Now, however, herders can own as many animals as they can afford, and many of them have acquired large herds. Goats are particularly popular, because their hair can be harvested for cashmere wool, a main export. Many herders intentionally acquire more animals than they need because building up strategic reserves can provide some protection from deaths – having more animals means more candidates to survive the winter.

This situation is challenging for a number of reasons. The amount of pasture land has not increased alongside the animal population, which means many of the animals are not able to bulk up ahead of the harsh winter months. This is a self-reinforcing problem – as the increase in herd sizes puts pastureland under threat from desertification, animals left with less to eat are more likely to perish, which leaves herders with little choice but to acquire more animals as a back-up plan. Goats, in particular, can degrade soil by eating saplings and trees, which are natural guards against desertification.

A CAREFULLY PLANNED RESPONSE: After a string of bad winters ending in 2002, policymakers realised there was a need to address this trend of climate change, animal deaths and desertification. A livestock insurance programme, it was thought, would serve to help herders recover their losses and provide a form of financial risk management that would encourage them to abandon the bigger-herd strategy. Traditional insurance policies, which were on offer already, were unpopular and deemed unable to address this problem. Sending loss adjusters out to far-flung regions in search of nomadic policyholders was expensive and time-consuming. With this in mind, the government decided to try indexed insurance, which foregoes claims on individual policies, instead using a collective method.

COMPENSATION: When conditions are met, all policyholders will be compensated, regardless of losses. Mongolian authorities enlisted partnerships with the World Bank, the Swiss Agency for Development and Cooperation, the US Department of Agriculture, microfinance organisations and others to launch a three-year pilot in 2006 in Bayankhongor, Uvs and Khenti provinces.

Initially the programme was based on weather – a winter with temperatures below a certain threshold would trigger payouts, regardless of whether animals died, on the assumption certain temperature thresholds would safely and reliably predict death rates. But despite a strong data-collection culture in Mongolia dating back to the country’s socialist period, the government decided it was unable to sufficiently monitor weather across the country.

Furthermore, there are no widely accepted definitions for what constitutes a dzud, save for informal opinions on livestock losses. The solution, therefore, was to offer indexed insurance based on animal population counts. Mongolian statisticians had already established a reliable annual livestock census-taking in December each year, and to further improve the system, another head count was added for each May.

DECISIONS, DECISIONS: Herders buying into indexed insurance under IBLIP can choose from two options: the base insurance product, in which losses of at least 6-10% of herds, depending on their home region, trigger payouts; or the disaster response product, in which losses of 25-30% or higher are compensated by a government fund. Herders who choose to go with the first option get the second for free; those who want only the severe-incident policy get coverage as long as they pay administrative fees. Herders can choose to insure all or a portion of the value of their herd, and pay-outs are in proportion to that coverage level. Herders on average chose to spend approximately MT30,000 ($23.40), rising to some MT1.5m ($1170) in riskier areas, Ulziibold said. The government’s fund for payouts is further backed by a $5m contingent-credit arrangement provided by the World Bank.

In keeping with the seasonal nature of the risk, sales are typically open in summer and autumn, and then are closed until the next summer. In 2006, IBLIP’s first year, around 2400 policies were sold for a total of MNT83.76m ($65,333), which covered 13% of herders and 10% of livestock in the areas where the insurance was available. In 2007 uptake jumped to about 3700 policies and approximately MNT129.05m ($100,659). Most of the herders in Mongolia opted for both commercial coverage and disaster-scale coverage.

RESPONSE: In the province of Uvs, a 2009 payout led to an increase in participation from 18% of herders to 30%. Overall in 2009 there was about MNT300m ($234,000) in policy income and around MNT1.8bn ($1.4m) in payouts, according to Bodi’s Ulziibold. “National sales for 2011 closed with MNT436m ($340,080) in policy income,” he told OBG.

As the programme has expanded past its pilot phase, the number of options on offer has now increased. Herders can now opt for a higher premium and a lower threshold, or vice versa. Data collection methods are currently under review as well. Some industry insurers have expressed concerns about whether the activity can be profitable in the long run. That, however, is a valid question not just for livestock in Mongolia but for most types of indexed insurance available worldwide.