The willingness-to-pay for insurance: evidence from Southern Ethiopia

Rainfall variability is a major problem in Ethiopia. The ability of Ethiopian farmers to deal with drought risk is made more scanty by the extension of land plots, which does not allow for a proper crop diversification, and by incomplete and inefficient financial markets which limit appropriate risk management financial strategies. Insurance can represent indeed a potential drought risk transfer mechanisms. However, the sustainability of a traditional drought insurance scheme is flawed by moral hazard, adverse selection, high administrative costs and risks not locally diversifiable. A promising alternative is index-based insurance whereby indemnities are related to an "index", rather than to verifiable losses. Several pilot projects and experiments have been carried out over the last fifteen years. This work is meant to contribute to such vast literature by reporting the results of an experiment carried out with Ethiopian farmers. Based on a sample of 120 rural households in the Wolayta zone - Southern Ethiopia, we aim to estimate the willingness-to-pay (WTP) for a drought index-based insurance product. Data were collected in 2013 through a discrete-choice experiment where household-heads were asked to make a choice out of different choice sets. Additional economic, financial and social data have been collected since 2011, within a wider research conducted on a larger sample including the one used in the current experiment. Data are analyzed employing a Mixed Logit model that allows for random preferences and overcomes a problem of the Multinomial Logit model, i.e. the irrelevance of independent alternatives (IIAs). The study is still in the implementation phase. Main preliminary outcomes are presented.