Economists Christopher Barrett of Cornell University and Andrew Mude of the International Livestock Research Institute have been working to develop a risk management program such that pastoral households in drought-inflicted areas are better able to cope with current and future climate risks. Through their research, first in Kenya and now in Ethiopia, the researchers have found that the creation of such a program is particularly important because of the apparent presence of poverty traps in these areas. For many households, if a drought shock is severe enough, their livestock losses will push them below some critical threshold such that their losses will be irreversible, or at the very least have very severe, long-term consequences.
At the core of both the Kenya and Ethiopia risk management projects is Index-Based Livestock Insurance (IBLI), wherein insurance payouts are determined by some measure which cannot be influenced by the pastoralists themselves, such as rainfall or area of vegetation. By providing index insurance rather than traditional insurance, insurance providers are able to mitigate threats of moral hazard and asymmetric information while still providing pastoral households the risk management they so badly need.
Like IBLI-Kenya, IBLI-Ethiopia uses as its index NDVI (Normalized Difference Vegetation Index), the data for which is obtained via satellite technology. Payouts occur to the pastoralists only when some threshold NDVI is reached. A satellite-based index is particularly useful in the face of climate change. While climate change variability over the past century can be assessed using statistical tools, the future impacts of climate change are what many developing nations are most concerned with and are also what appears to be most difficult to assess.
Using statistical relationships between NDVI and precipitation and temperature, Barrett and Mude hope to integrate IPCC predictions so as to adapt IBLI pricing appropriately to predicted climate change patterns specific to the Borana region. In doing so, the researchers aim to create an insurance product that is much more effective in meeting the changing needs of pastoral households.