# **_4.4. Government Fiscal Exposure_**

The Government of Mongolia is double exposed to livestock risk under this livestock insurance program. First, it covers losses exceeding a specific threshold (e.g., 25-30% of livestock mortality rate) through the DRP. Second, it acts as a reinsurer of last resort for the insurance companies selling the BIP through a stop loss reinsurance treaty sold at a fair price to the LIIP. This double exposure calls for adequate financing in order to avoid an increase in the fiscal burden of the government.<sup>7</sup> The proposed financing of the government’s potential losses relies on a combination of reserves and an World Bank contingent credit provided by the World Bank. The BIP reserve includes reinsurance premiums paid by participating insurers and eventually additional capital brought by the GoM. Once this reserve is depleted, the government will call the contingent credit facility. This facility can potentially provide the government with a lower cost capital relative to the accumulation of reserves, but the major disadvantage is that once disbursed this facility could exacerbate the debt burden of the country. The effectiveness of this facility would thus depend on the country’s post-disaster financial profile and more specifically on its post-disaster ability to service debt. A grace period of several years may allow the Government to recover an acceptable fiscal situation before starting to reimburse the contingent debt.

The disbursement of the contingent loan would follow the following process. If the actual BIP losses are in excess of the LIIP reserve and the BIP reinsurance reserve and/or if DRP payments have to be made, then the contingent loan will be drawn down to cover these excess BIP losses and/or the DRP losses.

# **5. Pilot Study**

Based on several technical criteria (e.g., geographical spread of risk, existing pastoral risk management programs), three _aimags_ were selected for the pilot phase of this program: Bayankhongor, Uvs and Khentii (see Figure 8). The risk profiles are summarized in Annex 1. The value at risk, i.e., the total value of animals exposed to natural disasters, is estimated at $55 million in Khentii, $43 million in Uvs and $33 million in Bayankhongor. The average annual loss, based on the losses over the last 33 years, is estimated at $3.2 million in Khentii, $1.5 million in Uvs and $1.9 million in Bayankhongor. Given the catastrophic risk profile of the mortality rates cased by the occurrence of _dzuds_ , the variability of the annual loss is high, particularly in Bayankhongor where the standard deviation is higher than the average. The average annual loss, in percentage of the value at risk, is estimated at 5.7 percent in Khentii, 4.7 percent in Uvs and 5.6 percent in Bayankhongor.

The historical morality rates are analyzed for the species at the _aimag_ level to determine the relationship between species. A simple linear correlation is conducted for all pairs of species within each of the three _aimags_ (see Table 4). They show positive correlations between the different species. Bankhongor has the most strongly correlated mortality rates. These coefficients of correlation are weaker in Khentii, particularly between sheep and cattle.

> 7 During the pilot phase, the Government may also have to provide ex post disaster relief in the area hit by a catastrophe and where livestock insurance is not offered.

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