Improving trust and relaxing credit constraints to enhance uptake of weather insurance: A randomized controlled trial in Ethiopia

Prof. Dr. Robert Lensink, University of Groningen

We organized a randomized controlled trial (RCT) in rural Ethiopia using a sample of around 10000 farmers to study the impact of lack of trust in the insurance product and lack of liquidity to pay for the insurance premium. Specifically, we create exogenous variation in the marketing channel of index insurance to build trust in index insurance, and allow a random subsample of subjects to pay the premium after harvest (we call this an IOU). The marketing treatment consists of marketing the index insurance product to  farmers through Iddirs.

Iddirs were created to help their members organize burial ceremonies. However, nowadays, they have increased their spectrum of activities, and have basically become insurance programs that provide mutual aid and financial assistance when members face shocks. As the IOU may lead to default problems, we also test whether this is the case, and we probe whether defaults can be reduced by using binding contracts. We also test, by using a second intervention round, whether joint liability contracts are useful in terms of reducing defaults.

We work together with Oromia Insurance Company (OIC) in Ethiopia. OIC, together with the Japan International Cooperation Agency (JICA) developed index insurance (IBI) for crops in the Rift Valley zone of Ethiopia to improve the resilience of households in the face of climate change. The product was originally implemented in five districts: Boset, Bora, Ilfata, Adamitullu-Jido-Kombolcha (AJK), and Arsi Negele. The standard insurance product is marketed and sold via cooperatives. The take-up of the standard product, however, turned out to be very low (around 7%). Thus the main objective of our intervention is to improve uptake of the weather insurance product offered by Oromia in the Rift Zone of Ethiopia, without inducing (strategic) defaults. We also test to what extent a combination of an IOU with a marketing treatment is recommendable.

Our pilot shows that both marketing via Iddirs and dealing with liquidity constraints via IOUs will enhance uptake. However, the interventions in itself do not seem to be sufficient: the increase in uptake due to the marketing intervention alone is not significant, while the IOU intervention may be troubled by defaults.  The latter can be resolved by requiring farmers to sign a binding contract, but if this is done, the increase in uptake again becomes insignificant.

However, a combination of the two interventions: an IOU with a binding contract, marketed via Iddirs do lead to a significant increase in uptake (from 8% to uptake rates above 30%) without default problems. A similar result can be achieved by combining an IOU with Iddir marketing and using a joint liability contract to reduce default problems. Thus our study provides rigorous evidence that a IOU, with a binding contract or a joint liability contract, marketed via Iddirs, will enhance uptake of index insurance considerable, without serious default problems.

About the speaker

Robert Lensink is Professor of Finance and Financial Markets at the University of Groningen. He is also Professor of Finance and Development at Wageningen University. He has widely published on issues related to Financial Development and Economic Growth, in more than 100 international Journals, including top journals like the American Economic Review, the Economic Journal, Management Science, the Journal of Management Studies, and the Journal of Public Economics. He has also authored four books. Under his supervision 25 PhD students have  finished their PhDs.

Venue: Conference room (0.16 & 0.17)

Date: 09 November 2017

Time: 12:00 - 13:00