POLICY RI SEA\RiC-H WORKING PAI1E1 2886

# Abstract

Hcrders in Mongolial have suffercd tremenidous losses in recent _dzu,d_ (winter disasters), with livestock mortality rates of over 50 percent in some locales. This studv exainiiies the feasibility of offering insuranice to coompenisate for animial deatihs. Suchi **an** undertaking is challeniginig in any country. Mongolia offers CvCeI more challenges given the vast territory in which herders tend over 30 million animials. lTraditional approaches that insure individual annials are simply not workable. The opportLuitics for fraud and abuse are significanlt. Monitoring costs required to mitigate this hehavior wVouIld be vcry high.

This study focuscs on the porential for uising the livestock mortality rate at a local level (for example, the _sum_ or rural district) as the basis for indemnifying herders. Applications of index insurance are growing around the wvorld, although no COlintrNrhas so far implemilenited sucIh insuranice for livestock deatihs. Buit few cOuIntries have such frcqtLienr and high rates of localized animn-al deaths as does Mongolia, and it is once of the few countries that perform an animal census every year. 'rhis con cept may therefore he precisely what is needed to start a social livestock insurance program.

Just as importanlt, the instirance that is used in Mongolia shotild not interfere with the exceptional efforts that experienced herders take to save animiials durinig severe weathier. Using an individual insurance max, in fact, diminish these efforts. Herders may ask, "Why should I work so hard to save my animals if I will simplpy he compensated for those that are lost?" Since the index insurance would pay all herders in the same region the same rate, the incentives for management to mitigate livestock losses remain strong. No one would reduce their effort to collect on insuraice. Those who incrcase their cfforts during a major event (dZud) xvould likely be compensated for this effort even thotigh they do not lose livestock. In some cases, they could reasonably expcr tO rcceive payments that wVolI]d compensate for the added effort or the added cost of trying to save their livestock.

'lUhis paper-a produict of the Rural Development and NatLral Resources Scctor Unit, East Asia and Pacific Region-is part of a larger effort in the region to fostcr seCLirc and sustainable livelihoods throuigh analytical and operational support for risk management and asset diversification strategies. The work described in this paper is finding operational application ulider thc Mongolia Sustainable Livelihoods Project. Copies of the paper are available free from the World Bank, 1818 H Striect NW, Washinigtoni, DC 20433. Please contact Evelyn Lagucidao, roomil MC9-324, telephone 202-458-2450, fax 202477-27.33, eimail address elaguidaoC@,wvorldbanik.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. Jerry Skees may be contacted at jskees@3qx.net. September 2002. (36 pages)

> _The Policy lResecarcf.' Working Paper Series disseminates the fiiidinigs of wvork in progress to entcoutrage the exchange of ideas about development issutes. An objective of/te series is to get the findinigs onut quickly. eve,, if the presenltationis are less thanl fuil) polished. The papers carrr the narmes of the authors anld should be cited accordim,g'v. The finzdzings, interpretations, and conclusions expressed in this paper are entirely those ofJ theauthbors. Tbev dli not niecessaril/ represent the Iieu' oLf the World Bank, its Executive Directors, or the counitries they represent._

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