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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Does index insurance help households recover from disaster? Evidence from IBLI Mongolia
Veronika Bertram-Hümmer (joint with Kati Kraehnert)
DIW Berlin & Leibniz University Hannover
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
In a nutshell…
Motivation: Index insurance is discussed with great enthusiasm in the policy community. Yet, there is little evidence of whether index insurance works.
Focus: What is the impact of indemnity payments from index insurance on the asset recovery of households after a catastrophic weather disaster?
Context: Index-based Livestock Insurance (IBLI) in Mongolia and a winter disaster in 2009/10 (“once-in-50 year event”) that caused mass livestock deaths.
Approach: Employ matching method and exploit phasing-in of IBLI in Mongolia to control for self-selection into insurance.
Results: 1. Index insurance helps households recover faster from disaster losses: the insured have a significantly, larger herd size 1 and 2 years ex post disaster. 2. The effect seems to be driven by improved consumption smoothing and relieved credit constraints.
Index insurance: payments depend on an exogenous, publicly observable index (e.g. rainfall, temperature or livestock mortality in the district) rather than on individual claims
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
What is known on the impacts of index insurance?
Ex ante disaster: impacts of insurance purchase
Insurance enables more profitable production decisions and larger investments [e.g. Karlan et al. 2014, Mobarak/Rosenzweig 2013, Cole et al. 2008, among others].
Ex post disaster: impacts of insurance payments
Insured households do less likely expect the need to reduce meals or sell livestock after a drought in the case of the Kenyan index-based livestock insurance pilot [Janzen/Carter 2013].
→ Contribution of the study
• impact of index insurance on households’ asset recovery ex post disaster
• in the unique case of a high-uptake, fully commercialized index insurance scheme: IBLI Mongolia
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
2009 2010April May June July Aug Sept Dec April May June July Aug Sept
2009 insurance
sales period
mid-yearlivestock survey
end-yearlivestock census
2009 indem-
nitypayment
period
2009 insurancecoverage period
Index-based Livestock Insurance Mongolia (IBLI)
Implementation: in 3 pilot provinces in 2006; scale-up to the national level until 2012.
Objective: “reduce herders’ livelihood vulnerability caused by dzud” (PIU 2012).
Indemnity payments: to insured herders when the district-level livestock mortality rate of a given species exceeds the threshold of 6 percent.
Insurance policies: sold by local agents, premiums and payments transferred via local banks.
Insurance cycle:
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Empirical Background
Herding in Mongolia
about 2/3 of households in rural areas
nomadic/semi-nomadic
households own on average 250 animals
mix of sheep, goats, camel, cattle, horses
2009/10 winter disaster
Extreme harsh winter led to mass livestock mortality
22% of livestock died (9.7 million)
almost 90% of herding households affected (ca. 1 million)
IBLI was available in 4 provinces
about 20% of households were insured
average payment in 2010: 312 US$
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EUROPEANMICROFINANCE WEEK 2015
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Coping with Shocks in Mongolia Household Panel Survey
Implementation: in three provinces of Western Mongolia between 2012-2015Sample: 1,100 herder households (amongst them 59 insured)
Questionnaire: demographics, welfare, disaster management & exposure, IBLI
Treatment variable: purchased IBLI in 2009 = received indemnity payment in 2010 (as all insured received indemnity payments in 2010)
Key variables: livestock holdings
• before the disaster: 2009 (retrospective)
• after the disaster: 2011 (retrospective), 2012, 2013, 2014
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Empirical Approach
Research question:
What is the impact of receiving IBLI payments in 2010 on households’ post-disaster recovery in livestock?
Challenge:
Households voluntarily decide to buy IBLI (no randomization)
Empirical methods:
• Bias-corrected matching estimator (Abadie & Imbens 2002, 2006, 2011) to account for selection into purchasing IBLI based on observable factors.
• Sample restriction exploit phasing-in of IBLI:
insured households in province where IBLI was available
non-insured households in 2 other provinces where IBLI was not available
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Estimated effect of IBLI payouts on households’ livestock recovery
Notes: Estimations based on the bias-corrected matching estimator using control variables on the household, district and sub-district-level (livestock in 2009, livestock lost in 2010, ecological zone, risk preferences, age, education, relative wellbeing in 2009, location, infrastructure)
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Discussion: Channels of the beneficial effect of IBLI payments
Descriptive statistics on insured households
“Did the indemnity payment help your household manage the disaster”
• 75%: Yes, it helped
• 25%: No, payment came too late or was too small
“Did your household use IBLI indemnity payments for the following purpose?”
• 73%: bought food and other household necessities
• 22%: bought livestock fodder and repaired shelters
• 0%: bought new livestock (!)
• 15%: paid back loan
• 14%: paid education and health expenses
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Estimated effect of IBLI payouts on households’ shock coping strategies
Insured households were
• less likely to sell their livestock***
• less likely to fall back on informal risk management strategies*
(exceptional livestock movements)
• more likely to receive credit from a local bank***
Notes: Estimations based on the bias-corrected matching estimator using control variables on the household, district and sub-district-level (livestock in 2009, livestock lost in 2010, ecological zone, risk preferences, age, education, relative wellbeing in 2009, location, infrastructure);
* significant at 10%-level, *** significant at 1%-level.
Discussion: Channels of the beneficial effect of IBLI payments
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FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Qualitative interviews with herders in western Mongolia in July 2014
Authors: What are the factors that helped you recover from the winter disaster so fast?
Herder: … Having only one child, we consumed less than other households,
which mainly accounts for our fast recovery.
Herder: … Money is the most helpful thing after a winter disaster. This money can help us to buy primary consumption goods.
Discussion: Channels of the beneficial effect of IBLI payments
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EUROPEANMICROFINANCE WEEK 2015
FINANCIAL INCLUSION FOR SUSTAINABLE DEVELOPMENT
Conclusions
• Descriptive statistics, an analysis of coping strategies, and qualitative interviews point toward two channels:
• Insured households obtained liquidity from both IBLI indemnity payments and from local banks due to relieved credit constraints.
• Additional liquidity was used for basic consumption expenditures and helped households to avoid slaughtering and selling animals.
• Index insurance helps households recover faster from disaster losses: the insured households have a significantly, larger herd size 1 and 2 years ex post disaster.
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