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**Livestock Insurance in Mongolia**

average for livestock producers. Nonetheless, the prudent policy<sup>makersatvariouslevels</sup> are now focused on a host of solutions.

The World Bank Sustainable Livelihoods project is one such<sup>efforttofind</sup> solutions. Three core activities are being coordinated: 1) management<sup>of pastoralrisk;2)</sup> development of community investment funds; and 3) improving<sup>theroleofrural micro-</sup> finance services. This report is part of the pastoral risk management component, however, important linkages will be made to the other two<sup>components.Amajor thrust</sup> of the pastoral risk management component is to provide integrated<sup>strategiestoassist</sup> herders in managing the covariant risk in Mongolian pastoral<sup>livestockproduction.A</sup> host of strategies are being considered. Insurance is one. An extremely<sup>importantaspect</sup> of providing integrated strategies is that they not work at<sup>cross-purposes.Thisguiding</sup> principle plays a major role in the focus of this paper. Significant efforts are underway to provide herders the information<sup>andtraining</sup> necessary so that they can effectively mitigate risk. Investments<sup>inforageequipment,</sup> improved weather forecasting, skill development, etc. are all<sup>targetedathelpingherders</sup> mitigate the effects of devastating weather and dzud. Key<sup>tothese effortsis thatherders</sup> become better managers and that they have incentives to work<sup>hardtoreducelivestock</sup> losses. Losing large numbers of livestock creates a long-term<sup>problemasit takestime to</sup> recover from such losses. Thus, it is also in the interest<sup>ofthebroadersocietythat</sup> herders be given the proper incentives to reduce livestock<sup>losses.</sup> Poorly designed insurance products could negate the incentives that are being<sup>structuredsocarefully.</sup> Under certain conditions, some herders may choose to reduce<sup>their intensive management</sup> when they have insurance. Any insurance product that fits into<sup>theoverallobjectiveof</sup> improving the risk mitigation of herders must be designed with<sup>theseconcernsinmind.</sup> Successful insurance cannot pay for bad management. If the<sup>insurance compensatespoor</sup> managers who are not working hard to mitigate risk during<sup>majorweatherevents,two</sup> serious problems will emerge: 1) the insurance will fail and<sup>2)theinsurancewillwork</sup> against the other efforts underway to improve management.

# _Financial Markets in Mongolia_

The financial sector is emerging slowly. There are excellent professionals<sup>in both</sup> the banking and insurance sectors. While there may be strong interest in developing livestock insurance, the task will not be easy. Further, the<sup>privateinsurancecompanies</sup> understand fully how difficult such a task will be, given the<sup>high transactioncostsof</sup> monitoring for both properly classifying risk and for sound<sup>underwriting.</sup> They also understand that the covariate nature of this risk in Mongolia makes<sup>itnearlyimpossible</sup> given their limited capital reserves. The private companies will simply not offer livestock insurance on any significant scale. There may be<sup>as manyas10private</sup> insurance companies in Mongolia. One of those companies<sup>isofferingsome 20insurance</sup> products and makes extensive use of the international reinsurance<sup>markets.</sup> Still, that company has no interest in offering livestock insurance to individual<sup>herders.</sup>