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 rural Ethiopia from a first attempt to market weather insurance products to existing informal risk-sharing groups. The groups were offered training on risk management and the possible benefits of holding insurance. Among those trained we randomized the content of training, with some sessions focusing on the benefits of informally sharing basis risk. Our results suggest benefits from marketing index-based insurance with an emphasis on informally sharing basis risk, at least in terms of uptake. Specifically, and 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.
Dercon, S.; Hill, R.V.; Clarke, D.; Outes-Leon, I.; Taffesse, A.S. Offering rainfall insurance to informal insurance groups: evidencefrom a field experiment in Ethiopia. (2012) 30 pp. [BREAD Policy Paper 032]
Offering rainfall insurance to informal insurance groups: evidence from a field experiment in Ethiopia