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**Livestock Insurance in Mongolia**

# **Examining the Feasibility of Livestock**<sup>**Insurance in Mongolia**</sup>

Livestock herds are a vital component of<sup>theMongolian economymakingup</sup> about one third of the GDP. Further,<sup>livestock herdersand their familiesmake up a large</sup> percentage of the poor in Mongolia.<sup>Eighty percentoftheherdershaveless than200</sup> animals. Herd sizes need to be greater<sup>than200tosustaina familyat a reasonablelevel</sup> of income. Added to the low levels of<sup>incomefor a vastnumber of the Mongolianherder</sup> families, are the persistent risks that<sup>plague livestock.Devastatinglivestock lossesare</sup> common in Mongolia. Natural disasters<sup>anddiseasenotonlycreateserioushardshipsin</sup> the short term but these type of risk<sup>alsolikelyretardthedevelopmentprocess.Given</sup> that there are few coping mechanisms<sup>otherthan theinformalfamilyarrangements,the</sup> high level of risk adds to the risk<sup>adversebehaviorofpoor herderfamilies.</sup> The development literature clearly shows<sup>thatthesetypeof risksbothslow theadoption of</sup> new technology and hamper the financial<sup>markets.BankersinMongolialistriskasthe</sup> number one reason they don't loan money<sup>to herders.</sup> Thus, it is clear livestock insurance<sup>could bean important innovationinMongolia</sup> for any number of reasons. However,<sup>therearefewsuccess storiesin theworldof wide</sup> spread livestock insurance. Many good reasons underlie the<sup>problemswithlivestock</sup> insurance. The opportunities for abuse<sup>aresignificant.Livestock managementiskey to</sup> mitigating losses. This creates opportunities<sup>foradverseselectionby those whoconsider</sup> the insurance a 'good deal' given<sup>theirmanagementpractices.Thosewhoarebetter</sup> managers will opt out. Further, once<sup>theinsuranceisavailable,moral hazard may occur</sup> as managers change their practices and<sup>become more risky.Controllingadverseselection</sup> and moral hazard requires investments<sup>indataand monitoring.Inacountrylike</sup> Mongolia, it is nearly impossible<sup>toenvisioneffectivemonitoringsystems.</sup> Vast distances separate the nomadic<sup>herdersacrossthecountry.</sup> Vast differences in management styles and risk among<sup>herdersarecommon.It isalsonearlyimpossibleto</sup> imagine risk classification systems<sup>thatwouldidentify thesedifferencesbeforethe</sup> insurance is sold. Finally, the large covariate risks<sup>thatarepresentinMongolian</sup> livestock herding operations make<sup>livestockinsuranceextremelychallengingforan</sup> emerging private insurance market<sup>thatisunaccustomedtousinginternationalcapital</sup> markets to share risk.

Despite these fundamental problems,<sup>the need for livestock insurancein Mongolia</sup> is very real. This paper takes on the<sup>challengesof makinglivestockinsuranceworkin</sup> Mongolia. It is organized into three<sup>primarysections:1) a brief discussion of impressions</sup> and the setting that raise concerns<sup>about theexistinginsurance systemandeventhe</sup> opportunities to introduce weather based<sup>insurance2;2)introducingtherecommendations</sup> and the reasons for the recommendations;<sup>and3)adetailedanalysisofthe</sup> recommendations. While any number of<sup>alternativesmay be tried,thelimitation of many</sup> of the choices leads to a relatively<sup>focusedrecommendation.</sup> The logic for this recommendation should emerge as the<sup>sectionsaredeveloped.Therecommendationis</sup> made with several key performance<sup>criteriainmind:1) theinsurance should notreward</sup> 2This section benefits from readings and<sup>reports prepared by others andinterviews conducted by the</sup> authors from July 30-August 7, 2001.