1. The Subjective Well-being Effects of Imperfect Insurance that Doesn’t Pay out Kibrom Hirfrfot Christopher Barrett Erin Lentz Birhanu Taddesse Cornell University July 28, 2014

2. Most people are risk averse (Rosenzweig & Binswanger, 1993) In theory, actuarially fair insurance improves welfare regardless of payout. Insurance usually not actuarially fair – loading. But, there is still demand – offers peace of mind. Assessing welfare gains in expected benefit terms is misleading. There is little evidence that insurance generates welfare gains. Low uptake of index insurance suggest no welfare gains from insurance (Gine et al. 2008; Cole et al. 2013; Binswanger-Mkhize, 2012) However, Jensen et al. (2014) find index insurance produces net utility benefit in Kenya. Yet if one believes in DARA, the poor stand to gain the most from insurance. We explore whether an imperfect insurance improves subjective well- being (SWB) for a poor, rural population. Novel approach: we exploit panel nature of data and no indemnity payout to test buyers’ remorse. Does index insurance lead to welfare gains?

3. We use data from eight woredas in the Borana zone of southern Ethiopia. Mobile pastoralism is main means of sustenance. Study setting and index insurance Cyclical movement in search of forage and water is common. Indigenous insurance institutions have declined due to recurrent drought.

4. Index based livestock insurance (IBLI) was introduced in August 2012. Uses NDVI to identify premiums and makes indemnity payout based on observable, exogenous index of rangeland conditions for each woreda. Payout is made when vegetation falls below a contractually stipulated threshold. There are four season in Borana: long rainy, long dry, short rainy, short dry. IBLI contracts are sold in two sales periods before the rainy seasons. l Study setting and index insurance (cont’d)

5. Three rounds of data have been collected A random sub-sample of respondents received discount coupons. Others received information extension. Some received both. Information extension: Poem tape and Comic books To date, there have been no indemnity payouts. Households who bought IBLI are materially worse off, but could be better off in broader well-being terms. Are they? Data March 2012Baseline516 hh August-September 2012Sales period January-February 2013Sales period March 2013R2 Survey508 hh August-September 2012Sales period January-February 2013Sales period March 2014R3 Survey514 hh

6. Estimation strategy

7. Estimation strategy (cont’d)

9. Ordered logit regression estimates Results (cont’d) Model Dependent variable: SWB(1)(2)(3) Predicted IBLI uptake0.753***0.601***0.828*** (0.251)(0.199)(0.290) Number of TLU insured0.010-0.004 (0.012)(0.008)(0.009) Purchased IBLI in R2 but not in R3-0.528***-0.516***-0.260* (0.167)(0.138)(0.145) Annual income (‘000 Birr) 0.002 (0.005)(0.004) Number of TLU owned 0.030*** (0.006)(0.007) Asset Index 0.238***0.224*** (0.069)(0.066) ControlsNo Yes Reera fixed effectNo Yes Observations1,529 Number of groups (households)550 Controls : Household head gender, age, age squared, schooling, and household size. Standard errors clustered at the reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1 In all 3 models, IBLI has a positive and significant effect on SWB. Our result is robust to inclusion of income, wealth, and var. controls. We find significant buyer’s remorse effect. The positive piece of mind effect is significantly greater than the negative buyer’s remorse.

10. Aggregate effect of IBLI on SWB and actuarially fair premium rates Standard errors clustered at the reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1 IBLI has a positive and significant aggregate effect on SWB. The point estimate suggests insuring a TLU increases SWB by 0.205. Insuring 5 TLU moves one from “very bad” to “bad” or “good” to “very good” on the SWB ladder. Average TLU owned≈20. Our result suggests full coverage would lift one from lowest to highest SWB category. Results (cont’d) Variables:Coef. Change in SWB0.205*** (0.072) Actuarially fair premium51.480 (109.527)

11. While we find statistically significant evidence of buyer’s remorse, its magnitude is considerably smaller than the positive effect of having insurance coverage. Even an imperfect insurance product that does not pay out can leave a poor rural population better off. Given IBLI is yet to payout in Borana, the actuarially fair premium for the sample period was roughly 51 Birr, significantly less than the average premium per TLU ( Birr 698 in R2 and Birr 575 in R3) IBLI was welfare enhancing even at a premium rate that was (temporarily and ex post only) an order of magnitude higher than the actuarially fair rate Conclusions: Insurance, even when it does not pay out, leads to welfare gains

12. Thank You

13. Prior to the August-September 2013 and January-February 2014 sales periods only discount coupons were distributed to 408 hh each. Treatments August-September 2012January-February 2013 Discount coupon Comic book Poet tapeNone Discount coupon Comic book Poet tapeNone Disc. coupon412411 (79.84)(79.81) Comic book861087799 (16.67)(20.93)(14.95)(19.22) Poet tape6608655071 (12.79)(16.67)(10.68)(13.79) None6266 (12.02)(12.82) Sample516515

14. LPM estimates of IBLI uptake LPM results Model Dependent variable: IBLI uptake(1)(2) Discount: SP1 only0.259***0.256*** (0.046)(0.047) Discount: SP2 only0.267***0.270*** (0.046) Discount: SP1 & SP20.206***0.203*** (0.047)(0.046) Value of discount (%) SP10.193***0.196*** (0.060)(0.059) Poet tape: SP2 only0.193***0.183*** (0.061)(0.057) Comic book: SP2 & SP20.164**0.169** (0.071)(0.069) IBLI premium: SP20.169*0.134 (0.087)(0.119) Iqub membership -0.086** (0.039) ControlsNoYes Reera fixed effectNoYes R-squared0.4060.418 Observations1,5351,532 Number of unique observations551 Standard errors clustered at the panel round and reera level in parentheses *** p<0.01, ** p<0.05, * p<0.1 Controls : Annual income, TLU owned, expected TLU loss, value of non-livestock assets, household demographic variables, household composition, group membership, and religion dummies Randomized instruments have significant effect on IBLI uptake. Receiving discount coupon and amount of discount have strong effect. Income has negative effect on IBLI uptake. Self insurance? Sargan & Basmann overidentification tests confirm instruments are valid. Wald test rejects null of joint insignificance of instruments.

15. Randomized instruments of discount coupons and information extension (comic books and poet tapes) have significant effect on IBLI uptake. Receiving discount coupon and amount of discount have strong effect. Income has negative effect on IBLI uptake. Self insurance? Sargan & Basmann overidentification tests confirm instruments are valid. Wald test rejects null of joint insignificance of instruments. Controls : Annual income, TLU owned, expected TLU loss, value of non- livestock assets, household demographic variables, household composition, group membership, and religion dummies Estimation results of IBLI uptake