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Improving Financial Tools so Rural Families in Ethiopia Can Better Cope with Drought

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Feed the Future Innovation Lab for Markets, Risk, and Resilience / Alex Russell

Families who rely on livestock in the driest parts of Ethiopia face a constant risk of losing half or more of their herds to drought. In the past decade, a new kind of insurance has helped tens of thousands to safeguard their livelihoods against that risk but it hasn’t helped everyone. Knowing who is most likely to benefit from the insurance—and who is not—can increase opportunity and stability for all families.

The Feed the Future Innovation Lab for Markets, Risk & Resilience has just launched a new project in Ethiopia that tests a new way to ensure all families benefit from their decisions on livestock insurance. The $355,164 grant, which runs from 2020-2021, will build on prior research measuring a family’s beliefs and preferences about risk and other factors that can determine whether insurance improves their welfare.

"Preferences and beliefs are not indirect or incidental,” said Glenn Harrison, the project’s principal investigator and director of the Center for the Economic Analysis of Risk (CEAR) at Georgia State University. “They are fundamental to whether these products improve or reduce the welfare of consumers.”

Index Insurance and Pastoralist Families

Index insurance is a type of insurance that avoids the high costs of verifying individual claims by basing payouts on an easy-to-measure index of factors, like rainfall or vegetation on the ground. This makes it possible to offer low-cost insurance to families who base their livelihoods almost entirely on livestock in dry, arid climates like Ethiopia’s Borana region. Index-based Livestock Insurance (IBLI) was first piloted in Ethiopia in 2012 by a team of researchers from the International Livestock Research Institute (ILRI), Cornell University, UC Davis and the University of Sydney. By 2017, more than 6,000 pastoralists throughout Borana had purchased IBLI. In Kenya, many thousands more have purchased or received government-funded IBLI coverage.

In spite of this progress, a continuing challenge is the high number of families who discontinue their IBLI coverage. Harrison and his team of researchers from Georgia State University, Cornell University, ILRI and Utrecht University believe that for these families, it may be that the protection does not in itself improve their welfare.

A New Measure of Welfare from Insurance

Harrison and his team are testing a new measure of welfare based on a family’s attitudes to risk, their sensitivity to the likelihood of losses and how comfortable they are with paying insurance premiums now for potential benefits in the future. Each of these can determine whether insurance coverage actually improves a family’s welfare.

The team will first measure families’ preferences and beliefs using tasks that simulate decisions on insurance. Then, participating families will be randomly selected into a control group that receives only basic information and one of two treatment groups.

In the first treatment group, families, receive tailored advice on whether to buy insurance and how much based on their preferences and beliefs. Families in the second group receive the same advice but their sales agents have financial incentives to ensure the purchase decision matches the research team’s recommendations that maximize the family’s welfare.

Rather than provide a one-size-fits-all intervention, this project’s interventions will be tailored to the specific circumstances, beliefs, and attitudes toward risk and time of a specific household. This makes it possible for families to maximize their welfare by deciding to purchase or not purchase insurance.

“The project’s underlying idea is a good one, and is based on how people really make decisions,” said Michael Carter, director of the Feed the Future Innovation Lab for Markets, Risk & Resilience at UC Davis. “The more reliably we can predict when insurance will better protect families, the better we can craft insurance products and market strategies that will reliably improve their welfare.”

Learn more about the project at https://basis.ucdavis.edu