The protective role of index insurance in the experience of violent conflict: Evidence from Ethiopia

Droughts are among the leading causes of livestock mortality and conflict among pastoralist populations in East Africa. To foster climate resiliency in these populations, Index Based Livestock Insurance (IBLI) products have become popular. These products, which allow herders to hedge climate risk, often utilize remote-sensed data to trigger indemnity payouts, thus ameliorating moral hazard issues associated with standard insurance products. We study how one such program in southern Ethiopia interacts with conflict risk created by insufficient precipitation. First, we show that a 1 mm negative shock to rainfall is associated with an increase of 0.32–0.43 percentage points of conflict risk, suggesting a one standard deviation decrease in rainfall has the potential to as much as double conflict risk faced by households. By leveraging a randomized encouragement experiment, we then show that participation in IBLI decreases the conflict risk that households face by as much as 4.9 percentage points and that the protective effect of IBLI grows when rainfall is poor. Our secondary analysis suggests that reduced migratory pressure and income diversification drive our results. Our results imply that index insurance programs can act as a protective factor in areas with complex risk profiles, where households are exposed to both climatic and conflict risks, which themselves may interact. • There is a strong link between precipitation and conflict risk among pastoralist populations in Southern Ethiopia. • Livestock insurance decreases the conflict risk and that the protective effect of insurance grows when rainfall is poor. • Reduced migratory pressure and income diversification are key mechanisms driving the results. • Insurance programs may act as a protective factor in areas with complex risk profiles.