Studying the market for crop micro-insurance in Ethiopia
A quantitative survey of 1,180 smallholder farmers in rural Ethiopia
Agriculture is the main source of income in Ethiopia, which leaves farmers vulnerable to adverse weather events. Crop micro-insurance has potential to help Ethiopian farmers withstand crop loss due to such events. Before an insurance product can be launched on the market, it is important to understand the demand for the product. The Global Green Growth Institute, the Ethiopian Agricultural Transformation Agency and Kifiya tasked us with estimating willingness to pay for two crop micro-insurance products: drought insurance and hybrid (drought and pest) insurance.
In the context of Ethiopia, where the insurance market is in its infancy, this is no simple task. Similar past studies in Ethiopia have resulted in most farmers showing a low or no willingness to pay because they considered all premiums they were shown to be too high. For the study to provide useful insights, it was important that the sample include at least some farmers that were willing to pay.
We designed our method in a way that enabled us to construct a demand curve of smallholder farmers’ willingness to pay for crop micro-insurance products from a relatively small sample of farmers (1,180). To do this, we asked farmers about their willingness to pay for two insurance products, with different farmers offered options at different price-points.
First, enumerators explained the concept and purpose of the two insurance products to the farmers. They then showed farmers a pre-defined premium at either the ETB 2,000 or 4,000 coverage level. Farmers were asked to accept or reject it, after which they were asked to provide the maximum price they would be willing to pay. Enumerators always asked questions about drought insurance before questions about hybrid insurance. They always presented hybrid insurance as equally or more expensive than drought insurance because it is a more comprehensive product.
We also oversampled farmers with certain characteristics, such as high self-reported exposure to crop loss, to minimize the number of households that were not willing to pay for the products. Due to the relatively small sample size across the coverage and premium levels, there was a real risk that we would not be able to create demand curves if even relatively few households reported no willingness to pay.
We found that farmers are very sensitive to small increases in price, and are only willing to pay a slightly higher premium for double the insurance coverage. This suggests that rather than considering the rate (premium over coverage), farmers are concerned about the affordability of the premiums they are shown. Interestingly, the steepest decline in willingness to pay occurs between the ETB 200 and ETB 250 mark: the price of the premium for community based health insurance in Ethiopia (ETB 240).
Farmers appear to use the first price shown to them (for the drought insurance) as an ‘anchor’ for the second price (for the hybrid insurance). They seem reluctant to pay more than this first price, even for better coverage and a more comprehensive insurance product. We call this price-anchoring.
We have seen that the way – and order – in which the products are presented to potential customers impacts their willingness to pay. For example, when presented with several insurance products, there is a real likelihood that households in rural areas would go for the cheapest insurance option, not the option that provides the best value for money. It’s therefore important to clearly communicate the benefits of the insurance to farmers, while being mindful of their price sensitivity and their reported preferences in terms of the design of the products.
Read more about the findings and policy recommendations in our policy brief.