Direct and indirect impact of index-based livestock insurance in Southern Ethiopia
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Direct and indirect impact of index‑based livestock insurance in Southern Ethiopia Ayako Matsuda1 · Kazushi Takahashi2 · Munenobu Ikegami3 Received: 11 June 2018 / Accepted: 25 March 2019 / Published online: 29 April 2019 © The Geneva Association 2019
Abstract This study identifies the period-specific impact of index-based livestock insurance sold to pastoral households in southern Ethiopia, based on 4-year panel data. While the impact of insurance payouts is not consistently positive across all sales periods, we find that they increase household income and milk production during drought years. We also find indirect effects for several seasons, whereby insured households receive more informal transfers when they obtain payouts and they tend to reduce cash savings and livestock holdings. These results suggest that formal insurance can crowd in informal insurance and that pastoralists may reduce their precautionary savings in response to an insurance alternative. Further analysis shows that pastoralists with a herd size around the poverty-trap threshold increase their livestock numbers after receiving payouts. Keywords Insurance · Drought · Livestock · Pastoralism
Introduction In most developing economies, weather-related risks such as droughts and floods are among the major threats to the rural poor, who rely heavily on crop and livestock production for their livelihood (Carter et al. 2007; Barrett 2011). While conventional agricultural insurance can help the rural poor recover from adverse weather shocks, the insurance market is underdeveloped in many low-income countries due to the classical incentive problems associated with asymmetric information, such as moral hazard, adverse selection, and the high transaction cost of verifying losses.
* Ayako Matsuda [email protected] 1
Ritsumeikan University, Kyoto, Japan
2
National Graduate Institute for Policy Studies (GRIPS), Tokyo, Japan
3
Hosei University, Tokyo, Japan
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A recent innovation in weather risk management is the emergence of index-based insurance, with payouts based not on actual losses experienced by policyholders but on objective weather or environmental parameters, such as rainfall, temperature, or remotely sensed estimates of vegetation levels, which are highly correlated with losses (Barnett et al. 2008; Zant 2008; Miranda and Farrin 2012). Since index insurance significantly reduces the transaction costs of monitoring and state verification, it is expected to fill the current gap in weather risk management in two important ways (Toth et al. 2017; Tafere et al. 2018). First, it offers a direct positive effect through payouts when an extreme weather event occurs, and it helps the insured households smooth consumption and mitigate the distressed sale of productive assets. Second, since the purchase of formal insurance can reduce uncertainty about future income flows, it has an indirect (often ex ante) positive effect on shifting policyholders’ economic behaviour towards greater expected retur
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