The following is a summary of Managing Agricultural Risk at the Country Level: The Case of Index-Based Livestock Insurance in Mongolia, by Olivier Mahul and Jerry Skees, published by the World Bank in August 2007 (WPS4325).
The Mongolian economy is heavily dependent upon livestock reared by semi-nomadic herders. Livestock provides sustenance, income, and wealth to nearly half of the population. Traditional livestock insurance based on individual losses has proven ineffective in Mongolia. This is due to high monitoring costs of individual herders spread across vast areas, ex ante moral hazard (herders fail to protect their livestock), and ex post moral hazard (herders falsely report animal deaths). Given this challenge, the Government of Mongolia requested assistance from the World Bank to address catastrophic livestock losses. After a thorough analysis, the World Bank recommended an index-based insurance program based on livestock mortality rates by animal species and soum (county), as well as a comprehensive risk financing strategy combining self-insurance, market-based insurance, and a social safety net.