Explaining insurance demand: Lessons from experiments in Ethiopia
Explaining insurance demand: Lessons from experiments in Ethiopia
EXPLAINING INSURANCE DEMAND: LESSONS FROM EXPERIMENTS IN ETHIOPIA
Formal insurance has the potential to complement informal risk-sharing and allow smallholder farmers in Africa to smooth consumption. Due to challenges with traditional indemnity crop insurance, such as moral hazard, adverse selection and costly state-verification, index insurance has recently been introduced. Despite its potential, demand for index insurance targeted at smallholder farmers remains low. One way to increase demand, which is currently being explored, is to offer insurance contracts to groups of farmers. In addition to reducing transaction costs, informal risk-sharing within these groups can provide protection against risks which are not covered by the index insurance. However, within these groups, heterogeneity may affect the incentives to informally share risk or purchase formal insurance. We test whether different sources of heterogeneity affects the willingness of Ethiopian farmers to take up formal index insurance or informally share risk.
RESEARCH QUESTION
Formal insurance has the potential to complement informal risk-sharing and allow smallholder farmers in Africa to smooth consumption. Due to challenges with traditional indemnity crop insurance, such as moral hazard, adverse selection and costly state-verification, index insurance has recently been introduced. Despite its potential, demand for index insurance targeted at smallholder farmers remains low. One way to increase demand, which is currently being explored, is to offer insurance contracts to groups of farmers. In addition to reducing transaction costs, informal risk-sharing within these groups can provide protection against risks which are not covered by the index insurance. However, within these groups, heterogeneity may affect the incentives to informally share risk or purchase formal insurance. We test whether different sources of heterogeneity affects the willingness of Ethiopian farmers to take up formal index insurance or informally share risk.
PROJECT
Participants in a lab-in-the-field experiment will be selected from traditional informal risk-sharing groups (iddir). Rates of return will be randomly assigned. Farmers are informed that they may receive an aggregate shock which will affect each farmer’s return proportionally. In case of a shock, farmers with group insurance will receive the insurance pay-out in a common pot while farmers in the individual insurance scheme will receive the insurance pay-out directly. We will analyse the effect of effort, idiosyncratic and aggregate shocks to production activities on the demand for formal insurance and decisions to informally share risk in repeated interactions under different information environments.
