MOTIVATION
Risk is pervasive in developing countries: earthquakes, floods, droughts, price shocks, market collapses, political conflict, illnesses spread by unsanitary conditions, and accidents due to unstable infrastructure are among the difficult circumstances the world’s poorest people face regularly. Without insurance against these shocks and events, people lose their livelihoods, assets, and income. Because temporary setbacks can compound quickly, insurance innovations are important to keep smallholders and the rural poor from falling into long-term poverty traps. In Ethiopia in 2009, IFPRI researchers saw the promise in an innovative index-based weather insurance plan—which automatically delivered payments to farmers when the local rainfall index fell below a certain level, thereby avoiding any costly estimation of potential yield losses. They conducted a study on how to streamline the plan’s design and potentially scale it up.
OUTCOMES
To better assess which groups of Ethiopian farmers would be early entrants into weather index insurance markets, IFPRI researchers conducted a willingness-to-pay survey among 1,400 Ethiopian households that had already been tracked for 15 years as part of the Ethiopia Rural Household Survey. Findings demonstrated that educated, rich, and proactive individuals were more likely to purchase insurance. Research has shown evidence of solid demand for insurance in Ethiopia with demand reaching about 40% of targeted farmers in one study district. Pilots show that insurance payouts did result in widespread improvements in welfare outcomes in those villages where group risk-sharing had been encouraged.
