Household Risk Management and The Demand for Microinsurance in Ethiopia

A publication by the World Bank reveals that households in Ethiopia struggle to cope with financial shocks, which leaves an unmet need for various insurance services. Insurers are encouraged to find a cost-efficient approach to address the unfulfilled insurable risks. Furthermore, it is advantageous to categorize the market by gender and residence.

A publication by the World Bank reveals that households in Ethiopia struggle to cope with financial shocks, which leaves an unmet need for various insurance services. Insurers are encouraged to find a cost-efficient approach to address the unfulfilled insurable risks. Furthermore, it is advantageous to categorize the market by gender and residence (rural/urban).

Although the study appears outdated, little has changed in the provision of innovative insurance services in Ethiopia. Hence, the report provides meaningful insight that can still be utilized by implementers- insurance firms, and fintechs. 

A survey of 2,922 households and 38 focus discussion groups was carried out in Addis Ababa and Amhara, Oromia, Tigray, and Southern Nations, Nationalities, and Peoples’ Regions between February and May of 2017 to understand their risk management needs and the strategies they use to manage those risks.

Demographic analysis 

  • There is a broad potential for the purchase of microinsurance as about 66% (2/3) of households are at or below the 200% poverty line.
  • Men are generally considered the head of households. However, women strongly impact HH decisions and should be considered in product development and marketing. Moreover, it would benefit insurers to have some products and services that are focused specifically on the needs of women.
  • The dependency ratio (population <15 and >64 divided by those from 15 to 64 years old) is particularly high in rural areas. Hence, households in rural areas tend to have the least disposable income for insurance. In addition, insurance products in these locations will require consideration of more children and the aged.
  • Products with processes or services tied to mobile phones exclude around 20% of the total potential market as HH ownership of at least one phone is about 90% in urban areas and 60% in rural areas.
  • Given the financial literacy rate of 20% in urban areas and 15% in rural, it is not considered that mobile platforms could have a large scale, but they may be suitable for a certain subset of the population.

Financial behavior

  • The saving practice of households is insufficient, leaving them vulnerable in case of a shock. 47% of urban and 68% of rural households don’t save for future expenses. For those that do manage to save, the saving amount remains low. On average, households that do save had set aside USD 330 (ETB 7785) for future expenses, with urban households having saved more USD 448 (ETB 9900) than rural households USD 149( 3,300 birr). Despite this, the use of cash or savings is the primary coping strategy for multiple shocks.
  • 79% of households belong to an Edir, a traditional community group where members typically make monthly contributions and receive monetary or in-kind benefits in case of adverse events. However, the primary value of membership may be social, and the financial coverage provided in the event of the death of a family member tends to be minimal. Hence, the practice of risk-pooling can be leveraged and the coverage complemented by formal insurance.
  • There may be opportunities for bundling insurance with credit as there is a need for credit and adoption from various sources. 51% of urban households and 47% of rural households reported borrowing in the last five years from banks, Microfinance institutions, Savings and Credit Cooperatives (SACCOs), friends and family and other sources. Urban HHs mostly borrow from a bank while rural HHs are more likely to borrow from SACCOs. 
  • To successfully market insurance products, an educational effort is necessary, as households lack sufficient knowledge on insurance. A significant percentage of urban and rural households, 42% and 62%, respectively, have never heard of insurance before. Fortunately, negative bias towards insurance is minimal, which is beneficial for service providers.
  • In urban households, the most common type of insurance was government-sponsored health insurance and motor third-party liability; in rural areas, respondents were mainly familiar with the government offered health insurance and funeral insurance.

Agricultural practice of rural households

  • The survey revealed that crop losses were the most commonly reported issue in rural areas. During focus group discussions, crop losses were also identified as the primary concern among participants.
  • 85% of rural households use some type of agricultural inputs such as improved seeds, fertilizers, and pesticides as part of their regular farming practices. Hence, input suppliers could act as a potential distribution channel for insurance policies.
  • Farmers may elect to skip expensive pesticides if they are protected from the potential loss by insurance.
  • The timing of premium collection can impact its success rate. This is because farmers often face cash constraints during the period when inputs are supplied.  
  • 55% of households obtain all the money needed to produce for the next season from selling products, only 9% save enough for the next production cycle and 34% do not save at all. These patterns provide insight into how service providers can design and market insurance products. 

Agricultural risk perception and experience (in rural areas)

The findings from the research indicate that individuals residing in rural areas are primarily concerned about their farming yield. A significant 56% of rural households experienced crop or livestock losses in the last year. Although crop loss was more common than livestock loss, focus group discussions revealed that farmers prioritize the health of their animals since the loss of livestock can hinder their ability to engage in farming activities. Therefore, designing an agricultural product that only covers crop losses may result in a significant coverage gap since livestock coverage is equally important to farmers.

Of the households that experienced crop loss, 93% reported moderate or great financial hardship, while 88% of households affected by livestock loss faced similar challenges. For households that reported crop loss, the average income decreased from USD 323 (ETB 7,150) in a typical year to USD 123 (ETB 2,720) in a year of shock, resulting in a 62% loss. Despite this, only 53% of households were able to pool together enough funds to cover their losses, indicating that coping mechanisms are inadequate.

Most focus group discussion participants saw great value in a proposed crop insurance product, as it would allow them to compensate for income loss and buy inputs for the next crop cycle. However, premium affordability is a major challenge. 

Given a choice between an index-based payout and an indemnity-based payout, participants would prefer an indemnity. The report outlines, indexed-based insurance products might face difficulty in communication and understanding for clients. 

A broader approach to agriculture and livestock insurance cover is needed, as any product should address three levels of losses: often repaying an input loan, replanting (if early in the season), and in replacing lost income or lost food. 

Health risk perception and experience

Both men and women, regardless of whether they live in urban or rural areas, ranked health risks as a significant concern. In the last year, 32% of households experienced at least one significant health event, which was identified as the most likely risk to occur during focus group discussions.

Although the high perceived likelihood of health risk matches well with actual experiences, the financial impact is overestimated. Despite many people fearing a high-cost illness, many basic events are manageable with existing resources, with 75% of HHs reporting that they were able to fully recover after the shock event and just 51% reporting moderate or great financial hardship. 

Households that are unable to fully recover financially after health shocks and those who avoid seeking treatment due to financial constraints can benefit from health insurance. During focus group discussions, most participants viewed a proposed hospital cash insurance product positively, with almost half of them willing to pay a reasonable premium.

Urban clients prefer to make premium payments on a monthly basis with their salary, while rural clients prefer to pay after harvest. Benefit levels may need to be tailored to urban vs. rural clients, as the average reported shock costs in urban areas are almost three times higher than in rural areas.

Read the full publication here

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