Enhancing drought resilience: An index insurance scheme for West African pastoralists

Drought risk and climate change pose significant threats to the livelihoods of over 50 million pastoralists in West Africa, whose primary economic activity relies on livestock production. The absence of insurance coverage exacerbates productivity constraints and hinders technological advancement in developing countries. In this study, we propose an index-based insurance scheme designed to protect pastoralists against drought-related losses. We conducted a field survey among 1,725 herders in Senegal, Mali, Niger, and Burkina Faso to evaluate losses from drought and calibrate the index insurance model. As opposed to most index insurance programs which rely on pre-established administrative or ethnic boundaries as insurance zones, we use an innovative methodological approach that minimizes spatial basis risk. We delineate homogeneous insurance zones across 12 West African countries covering an area of 2.6 million km 2 and calculate actuarially fair premiums for each insurance zone. Additionally, we assess the suitability of index insurance programs by analyzing basis risk and evaluating improvements in economic welfare through an expected utility framework. We also analyze how pooling the risk through a regional approach can reduce the loading factor up to 50%. Finally, we simulate the effect of premium subsidies on program participation and find that with a 50% subsidy, nearly 99% of the territory would benefit from purchasing an insurance policy.