Such data are critical for developing actuarial information and for understanding the potential cost of alternative designs.

The large losses reported during 1999-2002 clearly demonstrated that Mongolian livestock is exposed to catastrophic risk and that the potential losses are well beyond the financial capacity of the Government and the domestic insurance market. The new insurance law, passed in 2004, was an important step to strengthen the insurance industry through improved regulation and also included a provision for introducing index based livestock insurance in Mongolia. To the best of our knowledge, this is the first time an insurance law explicitly recognizes index-based insurance as insurance. Involving the insurance industry, operating on a commercial basis, has the potential to improve the sustainability of livestock insurance and contributes to strengthening the rural finance sector, which is a key element in the government strategy for rural economic diversification.

It is believed that the index-insurance product can be effectively underwritten, although significant financial exposure for a nascent insurance market that has extremely limited access to global reinsurance markets remains a significant challenge. Among the most novel aspects of the recommendations is the special financing facility established under this project. A syndicate pooling arrangement offers some opportunity to reduce the exposure for any individual insurer. This special pre-paid indemnity pool also assures that herder premiums will be protected until time of loss and that this unique line of business will not create financial spread for other lines of insurance for the insurance companies. Risks are layered out with insurers purchasing (unlimited) reinsurance capacity to a reinsurance fund that pays all herder losses beyond a certain threshold. Given that such a reinsurance fund cannot be built up fast enough to cover an early extreme loss, a World Bank contingent loan is also available to cover the most extreme losses.

This paper is organized as follows. The country agricultural risk management model developed by the World Bank is described in Section 2. Section 3 presents the risk assessment analysis of livestock mortality in Mongolia based on catastrophic risk modeling techniques. Section 4 describes the design of the Mongolian livestock insurance program. The pilot study is detailed in Section 5. Section 6 discussed challenges in the implementation and operation of the pilot project. Finally, the key issues are summarized in the conclusion.

# **2. Agricultural Production Shocks: Country Risk Management Approach**

Ex post funding by most governments in developing countries and international agencies has been seen as the only response to catastrophic losses. However, this approach turns out to be ineffective, inefficient and insufficient. A country agricultural risk management model is proposed, based on the experience of the World Bank’s Insurance for the Poor Program. Policy implications are derived from this model.

# **_2.1. Ex Post Funding: An Unsustainable Approach_**

Historically, most governments have not taken much interest in ex ante management of natural disasters because of low perceived vulnerability levels and the fact that most severe hazards manifest themselves very infrequently. In addition to this cognitive failure, there has been a willingness on the part of the international community to provide post disaster funding for vulnerable countries exposed to catastrophic events. The World Bank alone has disbursed more than US$40 billion of emergency and reconstruction loans (ERL) over the last 20 years.

As a consequence of underdeveloped domestic insurance markets and the lack of risk awareness or economic incentives to engage in ex ante risk management, governments generally adopt reactive approaches to natural disasters, relying on domestic budgets, including diversion of resources from other projects, and on extensive financing from international donors. In fact, emergency funding for reconstruction from international donors has become a linchpin of some 3