Does Index Insurance Crowd In or Crowd Out Informal Risk Sharing? Evidence from Rural Ethiopia

Abstract

We study how the introduction of a formal index insurance product affects informal risk‐sharing among pastoralists in southern Ethiopia. Using detailed social networks data, randomized incentives to purchase the insurance product, and hypothetical informal transfer data that mirror the existing customary arrangements, we find respondents’ own formal insurance uptake has no significant effect on their willingness to share risk through customary institutions. We also find weak evidence that a randomly matched peer's insurance uptake positively influences respondents’ willingness to make informal transfers to that match. Overall, our results imply that in this context index insurance does not crowd out informal risk‐sharing mediated by social networks.

Understanding pastoralists’ dynamic insurance uptake decisions: Evidence from four-year panel data in Ethiopia

“…In this region, widespread market failures combined with drought-related livestock mortality cause many pastoralists to slip into a poverty trap. This forces them to suffer poverty for prolonged periods (Lybbert et al, 2004;Santos and Barrett, 2011;Takahashi et al, 2019).…”

“…To reduce recall and reporting errors as much as possible, we provided respondents with the match's information, such as age, clan, and residential location. It was revealed that most respondents did not know three matches living outside the community (Takahashi et al, 2019). Thus, we focus on five matches within the community and construct � , and � , −1 as:…”

“…Despite its demonstrated welfare gains, the uptake of index insurance has remained low across many of the contexts in which it has been introduced. Research has identified several important factors affecting uptake, including basis risk (i.e., the deviation between actual losses and losses predicted by the index) (Gine et al, 2008;Mobarak and Rosenzweig, 2012;Jensen et al, 2018), household risk and ambiguity preference (Gine et al, 2008;Hill et al, 2013;Belissa et al, 2019b;Bryan, 2019), upfront premium payments (price) and credit constraints (Cole et al, 2013;Gine et al, 2008;Ntukamazina et al, 2017;Casaburi and Willis, 2018;Belissa et al, 2019a), a lack of trust and understanding (Cole et al, 2013;Ntukamazina et al, 2017;Belissa et al, 2019a), and social network and existing alternative risk-management mechanisms (Mobarak and Rosenzweig, 2012;Dercon et al, 2014;Cai et al, 2015;Sibiko et al, 2018;Takahashi et al, 2019). Due to data constraints, most research in this field has focused on insurance demand at one point in time.…”

Perceptions of Farm Size Heterogeneity and Demand for Group Index Insurance

“…The presence of basis risk is also an important factor in the demand for index insurance [6][7][8]. Basis risk occurs when index measurements do not reflect farmers' actual losses.…”

“…The index used was calibrated to provide a payout during the three worst droughts in the past twelve years, with one full and two partial historical payouts. 7 Even though the product has not yet reached the market, largely due to delays in the regulatory process and the conclusion of the USAID DR CRII program, part of this study's purpose was to inform how the product would be marketed. The commercial product was packaged for three-or four-month coverage, for the key drought prone periods of the year-the three-month option offered coverage from February to April and/or August to October, while the four-month option offered coverage from January to April and/or July to October.…”