Access to insurance can have a disproportionate effect on developing economies. Often, the risk of catastrophic property damage most affects the poorest people which disincentivizes them to make capital investments that could improve their economic status. One example is livestock insurance. In Mongolia, livestock has traditionally not been insurable. Mongolia also experiences occasional and severe winter storms, called dzuds, that result in the death of hundreds or thousands of livestock. These weather anomalies are predicted to increase with time and are a detriment to the Mongolian economy and quality of life. In Mongolia approximately 33% of the labor force are herders. The Mongolian government set out to reduce risks for capital investments in livestock. A central pillar of this effort was building a sustainable index-based livestock insurance (IBLI) market.
Index-based insurance is a relatively recent innovation that helps provide insurance in developing countries. Traditional insurance requires large datasets and in-depth knowledge of the property being insured. Index-based insurance helps to ease this cost by distributing payouts based on an established index value rather than individual losses. Common indices can include a lower-limit on rainfall, low-limit on the price of a product or the number of livestock killed in a dzud. By establishing an index that automatically triggers the cost of providing insurance can be lowered. Lower costs to insurers can help build a profitable and sustainable business model that provides affordable insurance. IBLIs are becoming more common and Mongolia developed a list of best-practices learned from their program implementation. These included:
Another advantage of government introduced IBLIs was their ability to encourage responsible farming practices. For example, sustainable grazing can help protect the land, prevent desertification, and allow for more economic growth in the long term. By introducing IBLIs the government can also introduce stipulations or price incentives to encourage good behavior. By requiring the herders to engage in sustainable farming or providing a price incentive for herders to visit a veterinarian, significant societal benefits and programmatic cost reductions can be realized.