Index-based drought risk financing toolkit for pastoral and agro-pastoral dryland systems

Index-based drought risk financing (IBDRF) instruments aim at protecting small-holder farmers and livestock keeper from the devastating impacts of drought shocks. Index-based models provide payouts to policyholders not based on a claim-verification process but based on an ‘objective’ index approximating the impact/loss. Index-based models are a particularly valuable instrument for covariate risks (e.g. drought) in small-holder agricultural or pastoral systems, where the claim-verification process is cost-prohibitive making traditional insurance and other financial instruments unviable. The schemes have specifically been designed by ILRI to protect pastoralists’ in the face of drought. They are based on a trigger mechanism that strikes at the early stages of the drought, anticipating the crisis. Beneficiaries, or insurance policyholders receive payouts based on a satellite index, indicating the relative forage production for livestock during the wet season. When the index falls below a pre-defined threshold, payouts are triggered, providing resources to protect livestock assets and livelihoods. This model assumes that, when forage is scarce, grazing resources are depleted quickly, leading to deteriorating livestock conditions and increased mortality. Thus, pastoralists could use the resources to make production decisions that reduce their herd losses during the drought (including, for example, purchasing animal fodder, water or veterinary services or supporting migration).