Insurance for Vulnerable Families Cuts Rural Poverty and the Cost of Aid by Half
When economist Munenobu Ikegami first traveled to northern Kenya, he was surprised just how dry it was even in a year without drought. The region doesn’t get enough rainfall to raise crops, so families who live there depend mostly on cattle or goats for their livelihoods.
In areas this dry, drought can be devastating. “Some families lose everything,” said Ikegami. “When they lose their traditional nomadic livelihoods, many take up selling charcoal to have enough to eat.”
Is it enough for national governments and aid agencies to focus only on families who have already lost everything? A new study using advanced economic modeling has found that adding insurance for families who are not yet poor is the most responsive and cost-effective way to reduce total poverty.
“You’re writing a blank check into the future if you don’t target vulnerable families as well as families who are already poor,” said Michael Carter, director of the Feed the Future Innovation Lab for Markets, Risk and Resilience at UC Davis and co-author on the study. “It’s really important to spend money on prevention, which keeps people able to take care of their own needs, rather than band aids after they have already fallen into poverty.”
Pastoralist Families and Drought
Severe drought is a constant risk for countries in the Horn of Africa and the Sahel region that spans the continent south of the Sahara Desert. Pastoralist families, who base their livelihoods on livestock, are especially vulnerable. If failed rains compromise the vegetation that keeps their animals alive, a family may have to choose between either selling off the animals they have left or skipping meals. Either strategy can keep a family poor long after the drought is over.
Ikegami, a professor of economics at Hosei University in Japan, studied these dynamics for nearly ten years as a research scientist for the International Livestock Research Institute (ILRI) in Kenya. He helped evaluate ILRI’s Index-Based Livestock Insurance program (IBLI), which was created and established in northern Kenya pastoralist communities by an international team of economists that included Carter, Chris Barrett, Sommarat Chantarat and Andrew Mude.
Ikegami’s research began with field data from northern Kenya. He worked with Carter, Barrett and economist Sarah Janzen to test different approaches to social protection based on a numerical model of how families manage their livelihoods. The model revealed what the team came to call the “social protection paradox.”
The paradox was that targeting some funding to households who are not yet poor actually has the biggest impact on poverty.
“If you don’t target some policies to vulnerable families they are going to join the ranks of the poor,” said Janzen, an assistant professor of economics at the University of Illinois. “This is especially true in a high-risk environment, where you could actually save money overall by setting aside funds for keeping vulnerable families from falling into poverty.”
Testing Effective Social Protection
Leading a new study with Carter and Ikegami, Janzen tested whether index insurance for individual families as a specific type of social protection would make a difference in terms of overall poverty. Index insurance is a type of insurance which bases payouts on an easy-to-measure index of factors, such as rainfall or average yields, that predict individual losses. IBLI is a type of index insurance that bases its payouts on satellite measurements of vegetation on the ground.
The new model showed that a local market to buy index insurance cuts the number of poor families by half, from 50 percent to 25 percent. Insurance does this by reducing the number of vulnerable families who fall into poverty. An insurance market also cuts in half the total cost of social protection compared to a direct cash transfer program for poor families alone.
These results are consistent with a 2018 paper by Carter and Janzen on social protection and climate change. In that study, they incorporated various climate change projections into their modeling. They found that in all but the most dire climate predictions, targeting insurance to vulnerable families could still reduce the total number of families who are poor.
Index Insurance Works, Even if Imperfect
One challenge to expanding the reach of index insurance is that when families have to pay for the insurance themselves they tend not to buy it. However, the new study found that government or donor subsidies to cover at least part of the cost of insurance further reduces the number of poor families by 10 percentage points.
“We know that with insurance there’s the challenge of increasing uptake,” said Ikegami, “but at the same time there’s a huge benefit from insurance if there is a poverty trap like we observed in northern Kenya.”
A large part of the benefit in the study are driven by newly insured families investing in agricultural inputs that increase their productivity and income. Carter calls this phenomenon—protection in bad years and higher incomes in good ones—Resilience+.
“While resilience to shocks and stressors is critical, the bigger opportunity is when families can get themselves onto a path to higher incomes,” said Carter. “That is the reason we pursue risk management innovations to reduce poverty and spur agricultural growth.”
Preventing Poverty to Lower the Cost of Social Protection
Climate change is causing more frequent extreme weather that continues to threaten poor and vulnerable rural families. In 2011, a drought in east Africa and the Sahel would become the worst in a generation, causing widespread famine. That emergency was the catalyst that shifted USAID’s development approach to a focus on building resilience. In March 2021, the Famine Early Warning System (FEWS NET) reported below average rainfall and poor vegetation conditions across the Horn of Africa.
This new research by Janzen, Carter and Ikegami contributes to a body of evidence showing that insurance can be a powerful tool for keeping families who face these kinds of risks from falling into poverty. In Kenya, IBLI provides a real-world example of how this can work.
Since its first policies were sold in 2010, IBLI has expanded to pastoralist families across Kenya and in parts of Ethiopia with a broad base of support that has included USAID, the World Bank and other donor organizations. In 2015 the Government of Kenya adopted IBLI for its Kenya Livestock Insurance Program (KLIP) and has since then scaled the insurance nationwide.
“Keeping people out of poverty makes a difference in childhood nutrition and education,” said Carter. “If, on the other hand, you let people wallow in poverty, it can also keep their children and their children’s children poor. That’s the essence of a poverty trap. That’s why we need more proactive social protection.”
The paper, “Can insurance alter poverty dynamics and reduce the cost of social protection in developing countries?” was published in the Journal of Risk and Insurance in 2019. In March of 2021 was honored by the American Agricultural Economics Association (AAEA) with 2020 International Section Best Publication Award. The study was funded by USAID and UK Aid. All cited research was supported by USAID through Feed the Future.