Microinsurance Decisions: Evidence from Ethiopia

This study reviews experimental evidence collected from a framed microinsurance field experiment using poor subjects in rural Ethiopia. It analyzes topics such as determinants of index insurance take-up, relationship between index insurance take-up, and wealth as well as ability of Expected Utility Theory to describe insurance decisions. The study also uses data from the Ethiopia Rural Household Survey. Study results have positive implications for the puzzle of low demand for actuarially unfair weather index insurance in developing countries and normative implications for the design and sale of microinsurance products. Findings include:

• Relationship between index insurance take-up and wealth is nonlinear;
• Subjects with intermediate levels of wealth have the highest take-up with low demand for index insurance from the poorest and the richest;
• There is no strong evidence that schooling, understanding of decision problems, or financial literacy increase index or indemnity insurance take-up;
• Background risk significantly impacts indemnity insurance take-up;
• Men and women seem to make choices about insurance quite differently;
• Participants choose more insurance cover in group index and indemnity decision problems than in individual decision problems.