Constraints and potential of livestock insurance schemes: a case study from Vietnam

Abstract

Livelihood systems of poor rural households are often so fragile that a small misfortune can destabilize households for years. Strategies for coping with risk include informal mutual aid agreements and/or formal microinsurance schemes. In developing countries, insurance markets are usually underdeveloped.Nevertheless, if the development path is supported by strong structures and institutions, anonymous markets will, over time, replace informal insurance networks as they are more efficient. In Vietnam, livestock is an important household income source and has additional non-economic functions in the households. For a long time, rural financial institutions in Vietnam financed only a small array of agricultural investments, but these frequently included livestock purchase. The absence of off-farm investment possibilities further promotes investment in livestock production. Failure of an investment, especially when loan-funded, can leave a household in an extremely vulnerable position. Livestock death is considered to be a major factor contributing to poverty. Farmers using credit to purchase livestock face two risks at once: (1) loss of the livestock due tovdisease and subsequently (2) failure of investment. Farmers would like to reduce the uncertainty, but a broad-based livestock insurance scheme does not exist in Vietnam. There are only a few formal and semi-formal schemes with very limited outreach. Thus, access to formal insurance is almost non-existent, and farm households have to rely mainly on informal mutual aid schemes within their social networks to reduce their risks. The objective of this paper is to contribute to the discussion on the general feasibility of a livestock insurance scheme in Vietnam. In this context, the demand for and supply of livestock insurance schemes is discussed. Quantitative (N=322) and qualitative data collection took place between 2001 and 2004. The quantitative data comprise cross-sectional household-level data from three different districts in Northern Vietnam. Four different types of insurance providers were selected for analyzing the supply side: 1. Insurance tied to credit within a state-owned company; 2. Insurance tied to credit within a development project; 3. A state-owned insurance company (which collapsed); 4. A private insurance company. By selecting these different insurance providers, the range of livestock insurance types offered in Vietnam was covered. The main result is that provision of sustainable livestock insurance is hampered principally by unreliable data on livestock mortality and by premia that are set politically at a low evel.