Offering rainfall insurance to informal insurance groups: Evidence from a field experiment in Ethiopia

Abstract

We show theoretically that the presence of basis risk in index insurance makes it a complement to informal risk sharing, implying that index insurance crowds-in risk sharing and leading to a prediction that demand will be higher among groups of individuals that can share risk. We report results from Ethiopia from a first attempt to market weather insurance to informal risk-sharing groups. The groups were offered training on risk management and insurance. We randomized the content of training provided to group leaders, with some sessions focusing on the benefits of informally sharing idiosyncratic basis risk. Consistent with learning informed by the theoretical results, we found that members of groups whose leaders had received training that emphasized risk-sharing had considerably higher uptake. We find that this effect can be explained either by a more careful selection of training participants by leaders or a direct impact of the treatment on insurance demand.