world bank group mongolia livestock insurance indemnity pool olivier mahul senior insurance...
DESCRIPTION
World Bank Group 3 Government Capital Support Int’l capital and reinsurance markets Agricultural Insurance Pool Domestic Insurance Companies Farmers/Herders Government Structured Relief International Donors Development Banks National agricultural insurance pools may be a potential way forward Rural Banks/MFIsTRANSCRIPT
World Bank GroupWorld Bank Group
Mongolia Livestock Mongolia Livestock Insurance Indemnity PoolInsurance Indemnity Pool
Olivier MahulSenior Insurance Specialist
Financial Sector Operations and Policy Department
World Bank Catastrophe Risk Financing SeminarWashington DC October 27, 2005
2
World Bank GroupWorld Bank GroupCountry Agricultural Risk Management
Country Agricultural Risk
Management
Agri-business segmentation
Social vs commercial insurance Traditional farming sector Emerging farming sector Commercial farming sector
Agricultural risk assessment
Probabilistic catastrophic risk model
Agricultural Risk Financing
Risk layering Insurance index Insurance pool Insurance and rural finance
Institutional capacity building
Data management Regulatory/supervisory framework Information and education Technical expertise
3
World Bank GroupWorld Bank Group
Government Capital Support
Int’l capital and reinsurance
markets
Agricultural Insurance Pool
Domestic Insurance Companies
Farmers/Herders
Government Structured
Relief
International Donors
Development Banks
National agricultural insurance pools may be a potential way forward
Rural Banks/MFIs
4
World Bank GroupWorld Bank GroupAction Plan
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.
5
World Bank GroupWorld Bank GroupLivestock Insurance in Mongolia
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:
23 million heads (83% sheep and goat) About USD 1 billion of value
Livestock losses in Mongolia
0.00%
5.00%
10.00%
15.00%
20.00%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
year
% 2002 GDP % livestock value
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World Bank GroupWorld Bank GroupIndex Based Livestock Insurance
Project Description
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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World Bank GroupWorld Bank GroupIndex Based Livestock Insurance
Objectives
Affordable and effective insurance Provide affordable and effective livestock insurance to all herders on a voluntary basis
Flexible institutional structure Simple and stable structure for implementation in the short run that allows
for flexibility in the future Ring fence livestock insurance business
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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World Bank GroupWorld Bank GroupInsurance Index Selection
Individual livestock insurance Impossible to know who owns which animals Moral hazard, adverse selection, high administrative costs
Weather insurance Incomplete and unreliable historical weather data Complex relationship between weather events (dzuds) and
livestock mortality Index-based mortality insurance
Detailed annual animal census (by sums and species) Adult animal mortality data organized and audited every year 34 years of data
Unfeasible
Unfeasible
Unfeasible
Unfeasible
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World Bank GroupWorld Bank GroupLivestock Risk Layering
DRP : Social insurance Monetary compensation in case of
extreme catastrophic events Herders pay small fee Funded by GoM and donors Voluntary participation
BIP : Commercial insurance Sold by approved commercial insurers Regulated by GoM Herders pay a commercial insurance
premium Voluntary participation
Disaster Response Product
Base Insurance Product
Retained by Herders and Banks
10% mortality
30% mortality
100% mortality
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World Bank GroupWorld Bank GroupLivestock Risk Financing
Objectives of Financing structure 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 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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World Bank GroupWorld Bank GroupLivestock Insurance Indemnity Pool
Herders’ self-retention
Disaster Response Product
Base Insurance Product
Livestock Insurance Indemnity
Pool
Government reinsurance
stop loss
GIC
Herders’ insurance
premiums net of reins. prem.
Reinsurance premiums
World Bank Contingent
Debt Facility
Loss frequency
15-20%
3-5%
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World Bank GroupWorld Bank GroupLivestock Insurance Indemnity Pool
Insurers GIC
paid into LIIP
Insurers’ GIC
March t April - June August
Risk -loaded
premium paid
into LIIP
Risk -loaded
premium
Insurers’ GIC
LIIP
Account
Equal to
105% of
risk - loaded
BIP
premium
Reinsurance premiums
DRP fees
BIP Reserve
July t+1
WB Creditor GoM Resources
BIP Reserve
LIIP
Account
Equal to
105% of
risk - loaded
BIP
premium
BIP
DRP
&
BIP
DRP Reserve
DRP
BIP
DRP
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World Bank GroupWorld Bank GroupLivestock Insurance Indemnity Pool
LIIP reserves
Unlimited stop loss
Insured losses
Insurers’ profit
Small and medium collective insured losses
Large collective insured losses
LIIP reserves
Unlimited stop loss
Insured losses
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World Bank GroupWorld Bank GroupPilot Aimags
Bayankhongor Khentii Uvs
# animals 1.2 mm 1.4 mm 1.5 mmValue 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%
Uvs
Bayankhongor
KhentiKey objectivesKey objectives Test the product Test the product
designdesign Learn if herders Learn if herders
will buy the will buy the insuranceinsurance
Learn if insurance Learn if insurance companies have companies have an interest in an interest in selling and the selling and the capacity to capacity to manage this manage this unique insuranceunique insurance
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World Bank GroupWorld Bank GroupIBLI: Risk financing strategy
LIIP net position
Probability exceedance curve
0%
20%
40%
60%
80%
100%
0 50,000 100,000 150,000 200,000 250,000
US$
BIP reserve - ne t positionProbabil ity exceedance curve
70%
75%
80%
85%
90%
95%
100%
-220,000 -170,000 -120,000 -70,000 -20,000 30,000 80,000
US$
Financing from the World Bank Contingent Credi t FacilityProbabilit y Exceedance Curve
0%5%
10%15%20%
25%30%35%40%
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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World Bank GroupWorld Bank GroupLong Run Transition
Transition out of pilot phase is subject to pilot performance
Greater market integration Move towards commercial reinsurance Increase responsibilities of insurance companies
and government regulatory agency Integration with microfinance and NGO initiatives
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World Bank GroupWorld Bank GroupChallenges for Long Term Sustainability
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 GroupWorld Bank Group
Thank you for your attention