1. Changes in credit uptake and on-farm risk management due to group insurance Morsink, Gebrehiwot, Geurts, Van der Veen Institute of Governance Studies (IGS), University of Twente, The Netherlands Presentation 2012 Research Conference on Microinsurance Enschede, 12 April 2012

2. 12/04/2012 Group insurance and on-farm risk management  Low agricultural investment: Uncertainty due to downside risk and/or lack of capital due to credit constraints?  A combination of agricultural insurance and credit?  Design of agriculture insurance is problematic.  Group insurance: What is the effect of group insurance (versus other designs) on on-farm risk management (investment)?

3. 12/04/2012 Analysing group insurance effect? INVESTMENT IN AGRICULTURE GROUP INSURANCE Insurance effect Average yield effect Group distribution effect

4. 12/04/2012 Theory: Indemnified insurance  A farmer will invest versus not invest when: ρU(y 1 - p + y b + g(A)) + (1- ρ)U(y 1 - p + y b ) > U(y 1 + y b ) (8)  The insurance has pay out T in case of bad weather and investment. No pay out without investment. Premium is m.  A farmer will invest with insurance versus not invest when: ρU(y 1 - m - p + y b + g(A)) + (1- ρ)U(y 1 – m - p + y b + T) > (10) U(y1 + yb)

5. 12/04/2012 Theory: Average area yield index  Area yield index insurance: The insurance has a pay out of S in case of bad weather (1- q) and the premium is n. For individual farmer four conditions exist: ρq, ρ(1-q), (1-ρ)q, (1-ρ)(1-q)  Farmers will now choose to invest with insurance versus not invest (and no insurance) ρqU(y 1 – n – p + y b + g(A)) + (13) ρ(1-q)U(y 1 – n - p + y b + g(A) + S) + (1- ρ)qU(y 1 – n + y b ) + (1- ρ)(1-q)U(y 1 – n + y b + S) > U(y 1 + y b )

6. 12/04/2012 Theory: If credit constrained  Investment A can’t be more than y1  A = y1 / p. With insurance the farmer can invest A = (y1 – m) / p or A = (y1 – n)/p.  Farmers will now choose to invest with insurance and taking up credit versus not invest (and no insurance) ρqu (y1 – n – p + yb + g(A)-d) + (17) ρ(1-q)u(y1 – n - p + yb + g(A) + S-d) + (1- ρ)qu(y1 – n + yb-d) + (1- ρ)(1-q)u(y1 – n + yb + S-d) > u (y1 + yb)

7. 12/04/2012 Research design  Framed field experiments, focus groups, questionnaires, and short interviews.  220 smallholder farmers in Tigray, Ethiopia  Random assignment of insurance:  Individual indemnity (T1)  Average area-yield index (T2)  in follow-up: group insurance (T3).  Pretest and posttest on-farm risk management preferences, controlling for past and current credit uptake and credit contraints.

8. 12/04/2012 Research design Pretest on-farm risk management game No treatment Average area yield index insurance treatmetn No treatment Indemnity insurance treatment Indemnity insurance Training Average area yield index insurance Training Posttest on-farm risk management Game

9. 12/04/2012 Change of relative investment in farming VariablesIndividual Insurance Area Yield Insurance Model 1Model 2Model 3Model 4 (Constant),070-,062,187,121 Land size in Tsemdi,000,001,006,009 Credit unconstraint=1,023,041-,046-,053 Credit change -,012-,018-,001-,021 Risk preference -,006-,025-,006,001 Risk averse=1,092,151-,091-,121 Insurance,209,095 Adjusted R Square-0,0270,2900,0080,062

10. 12/04/2012 Preliminary conclusions and way forward  Indemnity insurance seems to have significant and substantial effect on investment. Area yield index is significant but not substantial. Basis risk effect?  Effect of insurance on change in take up of credit (47% already), both positive and negative effect.  Risk preferences: Role of faith in decisions under risk versus probability  Aspirations?  Group dynamics and household decisions under risk.

11. 12/04/2012 Controls  Risk preferences, gain and loss frames  Time preferences  Credit constraints  Perception of own yield versus average group yield  Farm characteristics  Previous weather and yield experiences  Other household expenditures and investments  Social capital