Explore the impact of imperfect index-based livestock insurance on subjective well-being in a rural Ethiopian community where mobile pastoralism is common. The study investigates whether insurance leads to welfare gains for a poor, rural population by analyzing data collected over multiple rounds. The research aims to provide insights into the potential benefits and challenges of introducing insurance in settings with recurrent drought and limited indigenous insurance institutions.
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Does index insurance lead to welfare gains? Most people are risk averse (Rosenzweig & Binswanger, 1993) In theory, actuarially fair insurance improves welfare regardless of payout. Insurance usually not actuarially fair loading. But, there is still demand offers peace of mind. Assessing welfare gains in expected benefit terms is misleading. There is little evidence that insurance generates welfare gains. Low uptake of index insurance suggest no welfare gains from insurance (Gine et al. 2008; Cole et al. 2013; Binswanger-Mkhize, 2012) However, Jensen et al. (2014) find index insurance produces net utility benefit in Kenya. Yet if one believes in DARA, the poor stand to gain the most from insurance. We explore whether an imperfect insurance improves subjective well- being (SWB) for a poor, rural population. Novel approach: we exploit panel nature of data and no indemnity payout to test buyers remorse.
Study setting and index insurance We use data from eight woredas in the Borana zone of southern Ethiopia. Mobile pastoralism is main means of sustenance. Cyclical movement in search of forage and water is common. Indigenous insurance institutions have declined due to recurrent drought.
Study setting and index insurance (contd) Index based livestock insurance (IBLI) was introduced in August 2012. Uses NDVI to identify premiums and makes indemnity payout based on observable, exogenous index of rangeland conditions for each woreda. Payout is made when vegetation falls below a contractually stipulated threshold. There are four season in Borana: long rainy, long dry, short rainy, short dry. IBLI contracts are sold in two sales periods before the rainy seasons. 1 year contract coverage LRLD season coverage SRSD season coverage Jan Sale period for LRLD Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Period of NDVI observation for LRLD season Sale period for SRSD Period of NDVI observation for SRSD season Whether LRLD NDVI falls below the contract trigger value is announced l Whether SRSD NDVI falls below the contract trigger value is announced
Data Three rounds of data have been collected March 2012 Baseline 516 hh August-September 2012 Sales period January-February 2013 Sales period March 2013 R2 Survey 508 hh August-September 2012 Sales period January-February 2013 Sales period March 2014 R3 Survey 514 hh A random sub-sample of respondents received discount coupons. Others received information extension. Some received both. Information extension: Poem tape and Comic books To date, there have been no indemnity payouts. Households who bought IBLI are materially worse off, but could be better off in broader well-being terms. Are they?
Estimation strategy IBLI purchase ( opt-in ) decisions are likely to be endogenous. Opt-in decision is likely to depend on subjective assessment of risk. We use IBLI s randomized design features to deal with endogeneity. Two-step estimation strategy: First we estimate an uptake (selection) equation as Pr(IBLI???= 1) = ? + ?1????????1?+ ?2????????2?+ ?3???????? 12 ? + ?1??????1?+?2??????2?+?3?????? 12 ?+ ?4???????1?+ ?5???????2? + ?5??????? 12 ?+ ?1?????????1?+ ?2?????????2?+ ?????+ ??+ ???? All treatments are randomly assigned - can only be correlated with SWB through IBLI uptake. We control for a series of covariates that may affect IBLI uptake herd size and income, gender, age and educational attainment of household head, food aid receipt, household composition, reera fixed effects.
Estimation strategy (contd) In stage two we estimate the SWB equation as ??????= ? + ? ???????+ ? ??????+ ???????? 1+ ?`????+ ??+ ??+ ???? There are at least two ways IBLI can influence SWB Non-monetary (psychological) benefits or costs Insurance may reduce stress about adverse outcomes (give peace of mind): ( ? > 0) Insurance could increase stress if basis risk is high, and it s like lottery: ( ? < 0) Buyer s remorse: ? < 0 Monetary benefits or costs effect on net income/wealth Since premium payment reduces net income/wealth, indemnity payment increases it, net indemnity payments will influence SWB. This effect is captured by ?.
Estimation strategy(contd) We therefore estimate the aggregate effect of IBLI on SWB as: ??????= ? ???????+ ? ??????? Where purchase: ??????? is the TLU equivalent of wealth gained or lost due to IBLI ???? =(????????? ???????) ????? ??? ??? Since there wasn t any payout to date, our estimates are lower bound of the effects of IBLI on SWB. In SWB terms the actuarially fair premium is given as: ??? ? ??????? ? ??????? . =
Results(contd) Ordered logit regression estimates Controls : Household head gender, age, age squared, schooling, and household size. Model (1) Model (2) Model (3) Dependent variable: SWB Predicted IBLI uptake 0.753*** (0.251) 0.010 (0.012) -0.528*** (0.167) 0.601*** (0.199) -0.004 (0.008) -0.516*** (0.138) 0.002 (0.005) 0.030*** (0.006) 0.238*** (0.069) No No 1,529 550 0.828*** (0.290) -0.004 (0.009) -0.260* (0.145) 0.002 (0.004) 0.030*** (0.007) 0.224*** (0.066) Yes Yes 1,529 550 Number of TLU insured In all 3 models, IBLI has a positive and significant effect on SWB. Our result is robust to inclusion of income, wealth, and var. controls. We find significant buyer s remorse effect. The positive piece of mind effect is significantly greater than the negative buyer s remorse. Purchased IBLI in R2 but not in R3 Annual income ( 000 Birr) Number of TLU owned Asset Index Controls Reera fixed effect Observations Number of groups (households) No No 1,529 550 Standard errors clustered at the reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1
Results(contd) Aggregate effect of IBLI on SWB and actuarially fair premium rates Variables: Change in SWB Coef. 0.205*** (0.072) 51.480 (109.527) Actuarially fair premium Standard errors clustered at the reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1 IBLI has a positive and significant aggregate effect on SWB. The point estimate suggests insuring a TLU increases SWB by 0.205. Insuring 5 TLU moves one from very bad to bad or good to very good on the SWB ladder. Average TLU owned 20. Our result suggests full coverage would lift one from lowest to highest SWB category.
Conclusions: Insurance, even when it does not pay out, leads to welfare gains While we find statistically significant evidence of buyer s remorse, its magnitude is considerably smaller than the positive effect of having insurance coverage. Even an imperfect insurance product that does not pay out can leave a poor rural population better off. Given IBLI is yet to payout in Borana, the actuarially fair premium for the sample period was roughly 51 Birr, significantly less than the average premium per TLU ( Birr 698 in R2 and Birr 575 in R3) IBLI was welfare enhancing even at a premium rate that was (temporarily and ex post only) an order of magnitude higher than the actuarially fair rate
Treatments August-September 2012 Discount coupon book 412 (79.84) 86 108 (16.67) (20.93) 66 0 (12.79) January-February 2013 Discount coupon book 411 (79.81) 77 99 (14.95) (19.22) 55 0 (10.68) Comic Poet tape Comic Poet tape None None Disc. coupon Comic book Poet tape 86 71 (16.67) (13.79) None 62 66 (12.02) 516 (12.82) 515 Sample Prior to the August-September 2013 and January-February 2014 sales periods only discount coupons were distributed to 408 hh each.
LPM results LPM estimates of IBLI uptake Model (1) 0.259*** (0.046) 0.267*** (0.046) 0.206*** (0.047) 0.193*** (0.060) 0.193*** (0.061) 0.164** (0.071) 0.169* (0.087) Model (2) 0.256*** (0.047) 0.270*** (0.046) 0.203*** (0.046) 0.196*** (0.059) 0.183*** (0.057) 0.169** (0.069) 0.134 (0.119) -0.086** (0.039) Yes Yes 0.418 1,532 551 Controls : Annual income, TLU owned, expected TLU loss, value of non-livestock assets, household demographic variables, household composition, group membership, and religion dummies Dependent variable: IBLI uptake Discount: SP1 only Discount: SP2 only Discount: SP1 & SP2 Value of discount (%) SP1 Randomized instruments have significant effect on IBLI uptake. Receiving discount coupon and amount of discount have strong effect. Income has negative effect on IBLI uptake. Self insurance? Sargan & Basmann overidentification tests confirm instruments are valid. Wald test rejects null of joint insignificance of instruments. Poet tape: SP2 only Comic book: SP2 & SP2 IBLI premium: SP2 Iqub membership Controls Reera fixed effect R-squared Observations Number of unique observations No No 0.406 1,535 551 Standard errors clustered at the panel round and reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1
Estimation results of IBLI uptake Randomized instruments of discount coupons and information extension (comic books and poet tapes) have significant effect on IBLI uptake. Receiving discount coupon and amount of discount have strong effect. Income has negative effect on IBLI uptake. Self insurance? Sargan & Basmann overidentification tests confirm instruments are valid. Wald test rejects null of joint insignificance of instruments. Controls : Annual income, TLU owned, expected TLU loss, value of non- livestock assets, household demographic variables, household composition, group membership, and religion dummies
