Does index insurance help households recover from disaster? Evidence from IBLI Mongolia

contact@e-mfp.eu www.e-mfp.eu
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MICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Does index insurance help households
recover from disaster?
Evidence from IBLI Mongolia
Veronika Bertram-Hümmer (joint with Kati Kraehnert)
DIW Berlin & Leibniz University Hannover

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In a nutshell…
Motivation: Index insurance is discussed with great enthusiasm in the policy community.
Yet, there is little evidence of whether index insurance works.
Focus: What is the impact of indemnity payments from index insurance on
the asset recovery of households after a catastrophic weather disaster?
Context: Index-based Livestock Insurance (IBLI) in Mongolia and a winter disaster in
2009/10 (“once-in-50 year event”) that caused mass livestock deaths.
Approach: Employ matching method and exploit phasing-in of IBLI in Mongolia to
control for self-selection into insurance.
Results: 1. Index insurance helps households recover faster from disaster losses:
the insured have a significantly, larger herd size 1 and 2 years ex post disaster.
2. The effect seems to be driven by improved consumption smoothing and
relieved credit constraints.
Index insurance: payments depend on an exogenous, publicly
observable index (e.g. rainfall, temperature or livestock
mortality in the district) rather than on individual claims

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What is known on the impacts of index insurance?
Ex ante disaster: impacts of insurance purchase
 Insurance enables more profitable production decisions and larger investments [e.g.
Karlan et al. 2014, Mobarak/Rosenzweig 2013, Cole et al. 2008, among others].
Ex post disaster: impacts of insurance payments
 Insured households do less likely expect the need to reduce meals or sell livestock
after a drought in the case of the Kenyan index-based livestock insurance pilot
[Janzen/Carter 2013].
→ Contribution of the study
• impact of index insurance on households’ asset recovery ex post disaster
• in the unique case of a high-uptake, fully commercialized index insurance
scheme: IBLI Mongolia

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2009 2010
April May June July Aug Sept Dec April May June July Aug Sept
2009
insurance
sales period
mid-year
livestock
survey
end-year
livestock
census
2009
indem-
nity
payment
period
2009 insurance
coverage period
Index-based Livestock Insurance Mongolia (IBLI)
Implementation: in 3 pilot provinces in 2006; scale-up to the national level until 2012.
Objective: “reduce herders’ livelihood vulnerability caused by dzud” (PIU 2012).
Indemnity payments: to insured herders when the district-level livestock mortality rate of
a given species exceeds the threshold of 6 percent.
Insurance policies: sold by local agents, premiums and payments transferred via local
banks.
Insurance cycle:

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Empirical Background
Herding in Mongolia
 about 2/3 of households in rural areas
 nomadic/semi-nomadic
 households own on average 250 animals
 mix of sheep, goats, camel, cattle, horses
2009/10 winter disaster
 Extreme harsh winter led to mass livestock mortality
 22% of livestock died (9.7 million)
 almost 90% of herding households affected (ca. 1 million)
 IBLI was available in 4 provinces
 about 20% of households were insured
 average payment in 2010: 312 US$

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Coping with Shocks in Mongolia Household Panel Survey
Implementation: in three provinces of Western Mongolia between 2012-2015
Sample: 1,100 herder households (amongst them 59 insured)
Questionnaire: demographics, welfare, disaster management & exposure, IBLI
Treatment variable: purchased IBLI in 2009 = received indemnity payment in 2010
(as all insured received indemnity payments in 2010)
Key variables: livestock holdings
• before the disaster: 2009 (retrospective)
• after the disaster: 2011 (retrospective), 2012, 2013, 2014

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Empirical Approach
Research question:
What is the impact of receiving IBLI payments in 2010 on households’ post-
disaster recovery in livestock?
Challenge:
Households voluntarily decide to buy IBLI (no randomization)
Empirical methods:
• Bias-corrected matching estimator (Abadie & Imbens 2002, 2006, 2011)
to account for selection into purchasing IBLI based on observable factors.
• Sample restriction exploit phasing-in of IBLI:
 insured households in province where IBLI was available
 non-insured households in 2 other provinces where IBLI was not available

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Estimated effect of IBLI payouts on households’ livestock recovery
Notes: Estimations based on the bias-corrected matching estimator using control variables on the household, district
and sub-district-level (livestock in 2009, livestock lost in 2010, ecological zone, risk preferences, age, education,
relative wellbeing in 2009, location, infrastructure)

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Discussion: Channels of the beneficial effect of IBLI payments
Descriptive statistics on insured households
“Did the indemnity payment help your household manage the disaster”
• 75%: Yes, it helped
• 25%: No, payment came too late or was too small
“Did your household use IBLI indemnity payments for the following purpose?”
• 73%: bought food and other household necessities
• 22%: bought livestock fodder and repaired shelters
• 0%: bought new livestock (!)
• 15%: paid back loan
• 14%: paid education and health expenses

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Estimated effect of IBLI payouts on households’ shock coping strategies
Insured households were
• less likely to sell their livestock***
• less likely to fall back on informal risk management strategies*
(exceptional livestock movements)
• more likely to receive credit from a local bank***
Notes: Estimations based on the bias-corrected matching estimator using control variables on the household,
district and sub-district-level (livestock in 2009, livestock lost in 2010, ecological zone, risk preferences, age,
education, relative wellbeing in 2009, location, infrastructure);
* significant at 10%-level, *** significant at 1%-level.

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Qualitative interviews with herders in western Mongolia in July 2014
Authors: What are the factors that helped you recover from the winter disaster
so fast?
Herder: … Having only one child, we consumed less than other households,
which mainly accounts for our fast recovery.
Herder: … Money is the most helpful thing after a winter disaster. This money
can help us to buy primary consumption goods.

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Conclusions
• Descriptive statistics, an analysis of coping strategies, and qualitative interviews point
toward two channels:
• Insured households obtained liquidity from both IBLI indemnity payments and
from local banks due to relieved credit constraints.
• Additional liquidity was used for basic consumption expenditures and helped
households to avoid slaughtering and selling animals.
• Index insurance helps households recover faster from
disaster losses: the insured households have a
significantly, larger herd size 1 and 2 years ex post
disaster.

Does index insurance help households recover from disaster? Evidence from IBLI Mongolia

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