Effect Of Index-Based Livestock Insurance and Financial Resilience Among Pastoralists in Borana Community, Southern Ethiopia

Abstract

Pastoralists living in areas prone to climate shocks and market fluctuations, such as those in the Borana community of Southern Ethiopia, depend primarily on livestock for their livelihoods. This heavy reliance makes them particularly vulnerable to economic and environmental disruptions. Index-Based Livestock Insurance (IBLI) has been developed as a financial innovation to address these vulnerabilities. Unlike traditional indemnity-based insurance, IBLI provides payouts based on objective indices, such as satellite-derived vegetation cover and rainfall levels, eliminating the need for individual livestock loss assessments. This approach ensures timely compensation, enabling pastoralists to preserve their herds, recover from climate shocks, and maintain economic stability through income diversification and reinvestment strategies. This study assessed the effect of IBLI on the financial resilience of pastoralists in Borana. Four key constructs were examined: risk management, income diversification, asset preservation, and economic empowerment. The research was anchored in Prospect Theory, Modern Portfolio Theory, Social Capital Theory, and the Sustainable Livelihoods Approach, offering a multi-dimensional understanding of how financial tools can enhance resilience through improved decision-making, asset management, and social cooperation. A descriptive research design was employed, targeting a population of 24,560 pastoralists. Using Yamane’s formula, a sample size of 394 was determined and allocated proportionally across various districts using simple random sampling. Structured questionnaires with both closed and open-ended items were used to collect data. A pilot test was conducted to assess the instrument’s validity, and Cronbach’s alpha was employed to measure internal consistency, with a threshold of 0.7 considered acceptable. Data analysis was performed using SPSS version 25.0, with both descriptive and inferential statistical techniques, including frequencies, means, standard deviations, percentages, and regression analysis. Out of the 394 targeted participants, 372 successfully responded, yielding a 95.4% response rate, which confirmed data reliability. The findings showed that 79% of respondents believed IBLI significantly reduced financial losses during droughts, thereby preventing distress livestock sales. 74% reported that the insurance contributed to income diversification, with payouts helping them invest in alternative livelihoods. In terms of asset preservation, 81% indicated that IBLI protected their livestock assets during adverse weather events, allowing them to rebuild herds and continue income-generating activities. Additionally, 67% acknowledged the role of IBLI in enhancing economic empowerment, particularly through support for cooperative management, financial inclusion, and market engagement. Regression analysis revealed a strong positive correlation (R = 0.816) between IBLI and financial resilience, indicating that the insurance scheme has a significant and measurable effect on improving the financial security of pastoral households. The study concludes that IBLI plays a critical role in enhancing financial resilience among pastoralists in Borana. It recommends expanding IBLI access, launching awareness campaigns, subsidizing insurance premiums, and integrating IBLI with local savings and credit groups to increase participation and effect. These recommendations aim to support broader efforts in climate adaptation, financial inclusion, and the sustainable development of livestock-reliant communities. Future research should explore the long-term effects of IBLI on poverty reduction, as well as the potential of digital financial technologies to improve outreach and transparency. Comparative studies assessing IBLI alongside other resilience strategies would provide further insights for policy and programming in vulnerable pastoral regions.