Index Insurance and Cash Transfers: A Comparative Analysis from Northern Kenya

1. Index Insurance and Cash Transfers:A Comparative Analysis from Northern Kenya Nathaniel D. Jensen, Andrew G. Mude and Christopher B. Barrett Presented by Nathan Jensen Minneapolis, MN July, 2014

2. Motivation Both cash transfers and index insurance are often endorsed as effective tools for reducing poverty and providing social protection. Cash transfers have been extensively studied while the rapid proliferation of index insurance programs in developing countries has progressed without a parallel growth in knowledge of the quantity or impacts of such programs. In one of the most extensive synthesis written about the impacts if index insurance, Cole et al. (2012) conclude the following: “The field is in urgent need of evaluations analysing take-up and impact of marketed products… …at this stage, research on the impact of index-based insurance should be the key priority. It cannot be emphasised enough that very few empirical evaluations of marketed index-based micro-insurance programmes exist” (Cole et al. 2012, p. 46-47). JULY 2014 | CORNELL UNIVERSITY

3. What impact does index insurance coverage have on the production strategies and welfare of pastoralists? How do those outcomes compare to that of an unconditional cash transfer program? Behavioral changes to investment & production strategies in response to changes in risk profile and base income • Cash Transfers: Bianchi & Bobba 2013; Covarrubias et al. 2012; Gertler et al. 2012; Stoeffler & Mills 2014 • Index Insurance: Cai et al. 2010; Karlan et al. 2014; Mobarak & Rosenzweig2012 Welfare impacts of behavioral changes and direct financial transactions • Cash Transfers: An abundance of encouraging although not necessarily consistent studies. See Arnold (2011) and Fiszbein & Schady (2009) for surveys of the literature • Index Insurance: Karlan et al. 2014; Janzen & Carter 2013 JULY 2014 | CORNELL UNIVERSITY

4. Setting: Pastoralists in Marsabit, Kenya • Pastoralists generate a large portion of their income from livestock and livestock byproducts. (43% of our observations are 100% livestock dependent) • Drought is the largest killer of livestock. • Droughts periodically decimate herds. Causes of Livestock Mortality Marsabit, Kenya JULY 2014 | CORNELL UNIVERSITY Source: Author’s calculation (2009-2012)

5. Index Based Livestock Insurance (IBLI) • Introduced in northern Kenya, January 2010 • Objective: To insure households against livestock mortality associated with droughts • Signal: Remotely sensed normalized differenced vegetation index (NDVI) as an indicator of forage availability • Index: Predicts division average seasonal livestock mortality rate • Privately provided with public support (DFID, GoK, ILRI, USAID, WB) • See http://livestockinsurance.wordpress.com/, Chantarat et al. (2013) for details Source: Esri For more information on the IBLI project, visit http://livestockinsurance.wordpress.com/ JUNLY 2014 | CORNELL UNIVERSITY

6. Hunger Safety Net Program (HSNP) • Part of the larger GoK National Safety Net Program • Phase I: 2009-2013 (funded by DFID) • Unconditional bi-monthly cash transfers (~$28/transfer1) • 3 targeting strategies randomized at the community level: • Social pension: All members over the age of 54 • Depends ratio: Ratio of members that are dependent > 57% • Community based targeting: 50% of the community, selected by the community • No retargeting or graduation • See http://www.hsnp.or.ke/, Hurrell& Sabates-Wheeler (2013) for details. • 1 $ indicates USD, which is calculated using exchanges rates from 1/1/2010. • As a reference point, the average monthly income in our data is $51.57. JUNLY 2014 | CORNELL UNIVERSITY

7. Research Design & Data Survey data • Annual longitudinal survey of 924 households for 4 rounds • 4/5 IBLI index divisions • Seasonal data collected for the most relevant variables Research Design • Overlap with a cash transfer program (HSNP) in 8 of 16 communities • Randomized distribution of coupons providing from 10-60% discount on IBLI policies to 60% of sample each sales window JUNLY 2014 | CORNELL UNIVERSITY

8. Econometric Strategy Unobserved  Use household fixed effect model Assume Ǝ unobserved that are correlated with &  Instrument for • IBLI: Randomly distributed discount coupons • HSNP: Exogenous eligibility thresholds JUNLY 2014 | CORNELL UNIVERSITY

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10. The impact of covariate shocks and program participation on livestock sales (TLUs) JUNLY 2014 | CORNELL UNIVERSITY

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12. Impacts Normalized by Cost Among Clients Average values in the final survey round (clients) • Average cumulative cost per client by the final round (KSH) JUNLY 2014 | CORNELL UNIVERSITY

13. Impacts Normalized by Cost Among Clients Average values in the final survey round (clients) • Average cumulative cost per client by the final round (KSH) JUNLY 2014 | CORNELL UNIVERSITY

14. Conclusions • Households with IBLI coverage reduce herd size (precautionary savings), are more active in livestock markets during non-shock seasons, increase investments in livestock health services and realize greater productivity. • HSNP participants are more mobile, experience reduced livestock mortality and increased productivity. • Both programs are likely to improve income/AE. • HSNP & IBLI produce similar improvements/TPC/participant. • IBLI generates greater improvements/MC/participant. JUNLY 2014 | CORNELL UNIVERSITY

15. IBLI IVs • A test of balance between coupon recipients and non-recipients finds few significant differences (<10% of the characteristics observed). • Receiving a coupon has a positive and significant impact on demand. JUNLY 2014 | CORNELL UNIVERSITY

16. HSNP IVs • Tests for distortions in the responses around the thresholds does not reveal misreporting to meet eligibility requirements. • The intent to treat indicator has a positive and significant impact on the likelihood of participating in HSNP. JUNLY 2014 | CORNELL UNIVERSITY