International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI). Conference on "Towards what works in Rural Development in Ethiopia: Evidence on the Impact of Investments and Policies". December 13, 2013. Hilton Hotel, Addis Ababa.
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Index‐based Rainfall Insurance in Rural Ethiopia
1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Index‐based Rainfall Insurance in Rural
Ethiopia
Guush Berhane*, Daniel Clarke+, Stefan Dercon++, Ruth Vargas Hill* and
Alemayehu Seyoum Taffesse*
International Food Policy Research Institute, + University of Oxford, ++ University of Oxford and
Department of International Development, UK
*
Towards what works in rural development in Ethiopia: Evidence on the impact of
investments and policies
December 13th, 2013
Hilton Hotel, Addis Ababa
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2. Background
Weather risk remains a major challenge to farming in the
Ethiopia;
A large fraction of rural households in Ethiopia were affected
by drought – 50% (ERHS), 32% (AGP);
Drought had a significant impact on the welfare of affected
households:
16% lower consumption levels than those of the unaffected ones,
(Dercon, Hoddinott and Woldehanna 2005), and
lower growth rates in consumption in the 1990s compared to those
who had not faced serious problems in the 1984-85 drought (Dercon
2004).
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3. Background
Informal insurance hampered by risk covariance;
Information asymmetry problems and high implementation
costs limit viability of traditional formal insurance;
Index-based weather insurance offers new possibilities;
However, demand remains invariably low with basis-risk a
key challenge;
Steps taken to mitigate basis risk still limited;
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4. Objectives
Study question – is it possible to design better ways of
providing weather risk insurance;
Study objective:
explore possibilities that local risk-sharing institutions can
be harnessed to mitigate basis risk; and
assess impact of index insurance on welfare.
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5. Weather index pilot in Ethiopia
Study approach:
Long run pilot — first year in 2011, three years now, …
(looking at group institutions takes time)
randomized field experiment with an index product - a
group contract,
an MFI, and
Iddirs (local traditional risk-sharing institutions );
Premise: Combining features of informal and formal insurance is a
potential way forward – lower cost, greater trust, higher
demand!
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6. Observations
Specific questions:
1. Can group contracts mitigate basis risk by increasing sidepayments in the event of individual-specific bad outcomes? –
possible
Insurance improved access to grants/loans to cover crop loss
(crowding in of risk-sharing);
2. Do group contracts require ex-ante rules to effectively mitigate
basis risk? – they help
Insurance increased perceived ability
emergencies, but not business ventures;
to
finance
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7. Observations
3. What are the mechanisms through which these processes work and
what determines the direction of the outcome?
mandated rules,
access to funds
4. What are the effects on production behaviour?
Insurance encouraged farmers to apply more fertilizer and purchase
improved seeds
5. Next steps – 2013-14:
Continue with sharing rules and observe an additional season of insurance.
Included a feature to the index – i.e., gap insurance. A carefully designed cropcutting experiment is added to the index.
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