International Food Policy Research Institute (IFPRI) and Ethiopian Development Research Institute (EDRI). Conference on "Towards what works in Rural Development in Ethiopia: Evidence on the Impact of Investments and Policies". December 13, 2013. Hilton Hotel, Addis Ababa.

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Index‐based Rainfall Insurance in Rural
Ethiopia
Guush Berhane*, Daniel Clarke+, Stefan Dercon++, Ruth Vargas Hill* and
Alemayehu Seyoum Taffesse*
International Food Policy Research Institute, + University of Oxford, ++ University of Oxford and
Department of International Development, UK
*
Towards what works in rural development in Ethiopia: Evidence on the impact of
investments and policies
December 13th, 2013
Hilton Hotel, Addis Ababa
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2. Background
 Weather risk remains a major challenge to farming in the
Ethiopia;
 A large fraction of rural households in Ethiopia were affected
by drought – 50% (ERHS), 32% (AGP);
 Drought had a significant impact on the welfare of affected
households:

16% lower consumption levels than those of the unaffected ones,
(Dercon, Hoddinott and Woldehanna 2005), and

lower growth rates in consumption in the 1990s compared to those
who had not faced serious problems in the 1984-85 drought (Dercon
2004).
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3. Background
 Informal insurance hampered by risk covariance;
 Information asymmetry problems and high implementation
costs limit viability of traditional formal insurance;
 Index-based weather insurance offers new possibilities;
 However, demand remains invariably low with basis-risk a
key challenge;
 Steps taken to mitigate basis risk still limited;
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4. Objectives
 Study question – is it possible to design better ways of
providing weather risk insurance;
 Study objective:
 explore possibilities that local risk-sharing institutions can
be harnessed to mitigate basis risk; and
 assess impact of index insurance on welfare.
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5. Weather index pilot in Ethiopia
 Study approach:

Long run pilot — first year in 2011, three years now, …
(looking at group institutions takes time)

randomized field experiment with an index product - a
group contract,

an MFI, and

Iddirs (local traditional risk-sharing institutions );
Premise: Combining features of informal and formal insurance is a
potential way forward – lower cost, greater trust, higher
demand!
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6. Observations
 Specific questions:
1. Can group contracts mitigate basis risk by increasing sidepayments in the event of individual-specific bad outcomes? –
possible
Insurance improved access to grants/loans to cover crop loss
(crowding in of risk-sharing);
2. Do group contracts require ex-ante rules to effectively mitigate
basis risk? – they help
Insurance increased perceived ability
emergencies, but not business ventures;
to
finance
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7. Observations
3. What are the mechanisms through which these processes work and
what determines the direction of the outcome?

mandated rules,

access to funds
4. What are the effects on production behaviour?
Insurance encouraged farmers to apply more fertilizer and purchase
improved seeds
5. Next steps – 2013-14:

Continue with sharing rules and observe an additional season of insurance.

Included a feature to the index – i.e., gap insurance. A carefully designed cropcutting experiment is added to the index.
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