does index insurance help households recover from disaster? evidence from ibli mongolia

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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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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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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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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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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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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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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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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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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.



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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.



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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.

does index insurance help households recover from disaster? evidence from ibli mongolia

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