Willingness to Pay for Index Based Livestock Insurance among Vulnerable Pastoralists: Results from a Field Experiment in Northern Kenya

Abstract

Index based livestock insurance (IBLI) is designed for managing key covariate risk of livestock loss of pastoralists in the remote arid lands of northern Kenya, where insurance markets are effectively absent and uninsured risk is the main cause of persistent poverty. It compensates for predicted area livestock loss estimated using the objectively verifiable, remotely sensed measures of vegetative cover on rangelands and hence has great promise as market viable insurance product for these infrastructure deficient communities. This paper studies patterns and determinants of IBLI demand. It uses a double-bounded contingent valuation technique to elicit willingness to pay (WTP) for IBLI among pastoralists in five locations, where the product was scheduled for pilot sale. Insurance experiment games with real financial incentives were first played among the sample households to ensure their understanding about IBLI followed by sequential questions on insurance decision. Pastoralists were first asked to choose the proportion of herd they wish to insure. Conditional on their chosen proportion, they were then asked a sequence of dichotomous WTP questions, responses of which were used to form bounds for their unobserved WTP. A modified Heckman�s two-step conditional expectation correction approach is applied to estimate pastoralists� insurance demand conditional on household�s characteristics. Wealth, risk preference, perceived basis risk and subjective expectation of loss serve as the key WTP determinants, conditional on understanding of the mechanics and value of IBLI. Households most vulnerable to falling into a poverty trap were also shown to have the highest price elasticity of demand, despite their potentially highest dynamic welfare gain from the insurance. This is in contrast to the relatively low elasticity of demand found among the poorest, whose dynamic welfare benefits from insurance were minimal.