The effect of individual agricultural insurance on transfers by smallholder farmers in informal risk-sharing networks: empirical evidence from Tigray, Ethiopia

Thesis

We investigate the effect of formal individual agricultural insurance on transfers by farmers in informal risk sharing networks using an experiment conducted in rural Tigray in Ethiopia. Both index and indemnity insurance are investigated for a holistic picture. However, we focus on index insurance, particularly when there is basis risk.We employ a multi-stage sampling design in a framed field experiment, simulating three possibilities, namely, insurance availability, insurance take-up and insurance rejection.

Based on empirical considerations, we treat transfers as categorical and use multilevel analysis to fit a Cumulative Link Mixed-effects Model (CLMM). Thus we compare the odds of transfers under the three possibilities; insurance availability, insurance take-up and insurance rejection to transfers in a control in which formal insurance is unavailable. Having explored how transfers change in response to the three possibilities, we tentatively explore the underlying motives.

We find that farmers do not offer compensation for basis risk. When there is basis risk, farmers are 48% less likely to make transfers. This non-compensation for basis risk is worst for farmers in prescribed groups. Assuming socio-economic-dependent factors to be the underlying motives, we posit that the resultant economic incentives motivate farmers to punish their partners for their insurance decisions.

Providers of micro insurance in low-income farming markets will find the empirical findings useful in that they show the need for careful evaluation when designing agricultural insurance interventions aimed at realising a mutually beneficial relationship between index insurance and informal risk sharing. The findings also highlight the need for caution in prescribing farmers into groups as a condition for offering insurance.

Authors: Nyathi, Q

• Publication date: 2014
• Type of award: MSc by Research
• Level of award: Masters
• Awarding institution: Oxford University, UK
• Language: English
• Keywords: basis risk; indemnity insurance; risk-sharing; agricultural insurance; index insurance; group insurance; informal risk-sharing
• Subjects: Ethiopia; Development economics; Africa; Statistics (see also social sciences)