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Index‐based Rainfall Insurance in Rural Ethiopia

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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. 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 1
  2. 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). 2
  3. 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; 3
  4. 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. 4
  5. 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! 5
  6. 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 6
  7. 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. 7

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