Direct and indirect impact of index-based livestock insurance in Southern Ethiopia

Abstract

This study identifies the period-specific impact of index-based livestock insurance sold to pastoral households in southern Ethiopia, based on 4-year panel data. While the impact of insurance payouts is not consistently positive across all sales periods, we find that they increase household income and milk production during drought years. We also find indirect effects for several seasons, whereby insured households receive more informal transfers when they obtain payouts and they tend to reduce cash savings and livestock holdings. These results suggest that formal insurance can crowd in informal insurance and that pastoralists may reduce their precautionary savings in response to an insurance alternative. Further analysis shows that pastoralists with a herd size around the poverty-trap threshold increase their livestock numbers after receiving payouts.