The long-term effects of catastrophic drought insurance

October 2, 2023 @ 3:00 pm – 5:00 pm Europe/Rome Timezone
Sala Triaria, Villa Schifanoia
Mia Saugman
Join Christopher Barrett for his talk on the adverse effects of natural disasters on human capital formation.

Index-based livestock insurance (IBLI) to protect pastoralists against catastrophic herd losses associated with droughts were launched in northern Kenya in 2010 and in neighboring areas of southern Ethiopia in 2012. Short-term impact evaluations based on an individual-level randomised encouragement design, with re-randomisation over a five year panel period, found clear evidence of positive impacts on milk production, income, children’s education, as well as reduced meal skipping, distress livestock sales and child labour.

This presentation studies the longer-run impacts based on revisiting the same households ten years after the baseline surveys in each community, using the original randomised design for causal identification. Consistent with the broader literature’s evidence on the adverse effects of natural disasters on human capital formation, we find that by providing insurance against drought, the main disaster risk confronting pastoralists in this region, IBLI’s primary impacts appear with respect to human capital formation, specifically children’s educational attainment. Treated households exhibit triple the rate of age-appropriate children’s educational attainment as compared to control households. The human capital effect is synergistic with induced herd composition changes, as insurance reduces households’ precautionary savings in the form of small stock (goats and sheep) that provide financial liquidity but are mainly herded by children, inducing greater investment in camels that are lumpier, and thus less liquid and riskier, investments. As in several other long-run studies of financial interventions, many of the short-run income and non-human asset effects dissipate over time.

This project has received funding from the European Union’s Horizon 2020 research and innovation programme under the Marie Sklodowska-Curie grant agreement No 101031139