Tailoring Advice and Incentives to Enhance Consumer Welfare from Livestock Insurance

Tailored Advice about Expected Consumer Surplus from Insurance:
- The individual-specific tailored advice is calculated based on an Expected Utility Theory (EUT) model of expected consumer surplus from index insurance demand with subjective beliefs about losses, building on the method developed by Harrison, Morsink and Scheneider (2020). We combine information about product characteristics with individually estimated risk preferences that were elicited at baseline, and real-time information on the herder's current herd size and expectations about losses, and weather realizations. In case a pastoralist owns a particular animal, we calculate, in real time, the expected consumer surplus (ECS) from purchasing IBLI for each potential share of the number of animals of this type, and select the share which generates the highest expected consumer surplus, conditional on a significant difference between purchase and non-purchase. If this share is 0, we advise the herder not to purchase insurance, while if this share is larger than 0, we advise the herder to purchase insurance. If there is no significant difference we inform the herder that our advise is inconclusive.

Sales and Welfare Incentive:
- The standard sales incentive structure that OIC uses to incentivize sales activities by VIPs consists of a commission of 8\% of the total insurance premium sales of the individual and a bonus that is increasing in size conditional on the total insurance premium sales, and is maximum USD 33 per VIP. In the zones assigned to the welfare incentives the objective is to incentivize VIPs to promote the tailored advice that maximizes ECS, which varies across individual herders, rather than to promote maximum sales.

Therefore, the VIP welfare incentive structure was designed to maximize incentives for the VIP if the pastoralist's purchase decision follows the advice exactly, and to decrease the VIP incentive gradually as the pastoralist's purchase decision differs from the tailored advice. To test the impact of these different incentive structures, the average expected incentive per pastoralist in each zone was designed to be similar in the zones with sales incentive and the zones with welfare incentives, so that differences can be attributed to the incentive structure, rather than to differences in the magnitude of the incentive.

2022-01-17

2023-02-28

Insurance Demand
- Extensive margin: purchase or non-purchase
- Intensive margin: number of animals insured (in numbers and in Tropical Livestock Unit (TLU))

Adherence to advice
- Extensive margin: follow the advice when advised to purchase or not advised to purchase
- Intensive margin: the absolute value of the difference between the advised number of animals to insurance and the actual number of animals insured, conditional on being advised to purchase or advised not to purchase.

Expected consumer surplus

Welfare(Pastoralist's subjective well-being, Herd size, Distress livestock sales during drought, Livestock losses)
Mechanisms( Insurance agents' effort)

We conduct a cluster-randomized controlled trial with 2400 pastoralists from 240 zones in 80 kebelles (3 zones per kebelle) in Borena in Ethiopia. Each kebelle has one VIP and this VIP conducts the training activities in each of the three zones in the kebelle. The three zones in each kebelle are randomized into one of three treatment arms:

T1: No tailored advice for pastoralists + Sales incentive for VIPs (Status quo)
T2: Tailored advice for pastoralists + Sales incentive for VIPs
T3: Tailored advice for pastoralists + Welfare incentive for VIPs

It is thus important to note that each VIP conducts activities in three zones, and the VIP incentive structure consists of a standard sales incentive in two zones, but a welfare incentive in one zone.

To create a sampling frame of geographical areas to conduct our study we identified 80 kebeles, with one VIP each per kebelle, that had primary cooperatives through which IBLI could be sold that were either already actively selling IBLI (55) or expressed willingness to sell IBLI (25). These kebelles were selected through conversations between OIC and pastoral development offices in the Borana zone. Kebelles with security concerns, extreme remoteness, or concerns with the commitment of the VIP, were excluded from the sample. Each kebelle in Borana consists of three zones, which are units that are geographically seperated from each other and comprise a community of households. Within each zone, through the kebelle development office, lists were collected of all households in a kebelle. From this household list 40 households were randomly sampled, and the first ten households that herded livestock and were willing to participate in our study were selected for inclusion in our sample.

Randomization is conducted at the zone level, with stratification at the kebelle level, implying that each VIP serves three zones, each with one of the three treatment assignments: T1(No tailored advice for pastoralists + Sales incentive for VIPs (Status quo)), T2( Tailored advice for pastoralists + Sales incentive for VIPs), and (T3: Tailored advice for pastoralists + Welfare incentive for VIPs). This stratification strategy was chosen to allow us to incorporate strata fixed effects controlling for VIP characteristics, variation in weather shocks, and variation in product characteristics. Randomization was executed after the baseline survey and before the delivery of the intervention.

Randomization is conducted at the zone level

Yes

240 zones

2400 pastoralists

800 pastoralists by each treatment arm