Contents lists available at ScienceDirect International Journal of Disaster Risk Reduction journal homepage: www.elsevier.com/locate/ijdrr Designing index-based livestock insurance for managing snow disaster risk in Eastern Inner Mongolia, China Tao Ye a,b,c, ⁎ , Yijia Li a,b,c , Yu Gao a,b,c , Jiwei Wang a,b,c , Miluo Yi a,b,c a Key Laboratory of Environmental Change and Natural Disaster, Ministry of Education, Beijing Normal University, Beijing 100875, China b Academy of Disaster Reduction and Emergency Management, Ministry of Civil Affairs & Ministry of Education, Beijing Normal University, Beijing 100875, China c Faculty of Geography, Beijing Normal University, Beijing 100875, China ARTICLE INFO Keywords: Index-based livestock insurance Snow disaster Eastern Inner Mongolia ABSTRACT Index-based agricultural insurance is of particular importance for vast, less heterogeneous and sparsely populated regions. This paper has designed an index-based livestock insurance for managing snow disaster risk for the pastoral regions of Eastern Inner Mongolia, China. Based on detailed information from field surveys, the designed insurance plan targets extra feeding costs induced by snow cover rather than mortality. It employs percentage height of grass covered by snow as the trigger for insurance payments and calculates the aggregate number of days triggered between November 1st and April 30th as the index for calculating insurance payments. A comparison with existing commercial mortality insurance (CMI) based on certainty-equivalent analysis indicates that the designed snow-index insurance (SII) is superior in terms of potential users’ welfare, as it is aimed correctly at the major source of income risk. Even when the loading for administrative costs is included in the premium, the SII still brings welfare improvements for most regions of the study area. 1. Introduction Agricultural activities and output are exposed to both frequent and severe influences from natural disasters, chiefly hydro-meteorological events. As a result there is now a need to use weather or satellite index- based insurance to manage agricultural disaster risks. Compared to conventional indemnity-based agricultural insurance, index-based in- surance incurs considerably fewer administrative costs in loss inspec- tion, charges agricultural producers lower premium rates, better prevents adverse selection and moral hazard, and allows easier connection to capital markets to transfer catastrophic risk [1]. Conse- quently, index-based agricultural insurance has been widely advocated [2–6]. For developing countries, it is even regarded as “guidance on ways to promote establishing sustainable private agricultural insurance markets” [1], although it may suffer from the issue of basis risk. The adoption of index-based agricultural insurance has led to the recent expansion in the size of the global agricultural insurance market [7]. Index-based insurance uses objective and transparent indices to determine insurance payment [1]. Therefore, it is of particular rele- vance to large, less heterogeneous and sparsely populated regions. In these regions, individual losses are highly correlated and basis risk can be easily controlled, whereas the application of traditional indemnity- based agricultural insurance induces substantial administrative costs. In this sense, the index-based insurance approach is ideally suited to pastoral farming. In recent years, the World Bank has supported the development of index-based livestock insurance (IBLI) in Mongolia and Kenya. The Mongolia IBLI targets Dzud disaster, a compound of heavy snow, strong winds, low temperatures and lack of food [8]. As many different factors contribute similarly to mortality, the Mongolia IBLI fails to identify an objectively measureable index to set the insurance payment, and uses end-of-season, government-surveyed livestock mor- tality rates as the criteria for setting insurance indemnity [9]. The Kenya case targets livestock starvation caused by grassland drought and uses the Normalized Difference Vegetation Index (NDVI) to predict season-end mortality rates and to decide insurance payment [10]. The design succeeds admirably in catching the major cause of local livestock mortality. The quantitative loss relationship between drought intensity denoted by NDVI and mortality rate is strongly supported by detailed historical loss data. The autonomous region of Inner Mongolia lies on the border of northern China with Mongolia, on the eastern and southern part of the Mongolian Plateau. It is one of the most important pastoral areas in China and is famous around the world. The eastern part of Inner Mongolia enjoys optimal precipitation conditions, and thus the best grassland, and also the largest share of livestock in this region. Larger amounts of precipitation also bring heavier snows in winter times, http://dx.doi.org/10.1016/j.ijdrr.2017.04.013 Received 7 December 2016; Received in revised form 24 April 2017; Accepted 24 April 2017 ⁎ Corresponding author at: Key Laboratory of Environmental Change and Natural Disaster, Ministry of Education, Beijing Normal University, Beijing 100875, China. E-mail address: yetao@bnu.edu.cn (T. Ye). International Journal of Disaster Risk Reduction 23 (2017) 160–168 Available online 27 April 2017 2212-4209/ © 2017 Elsevier Ltd. All rights reserved. MARK