Paper

Contract Design in Insurance Groups

How is contract design used to increase benefits from risk-sharing?
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This paper explores contract choice in funeral insurance groups and its consequences for welfare. It models the contractual design based on a survey of 78 funeral insurance groups in rural Ethiopia. In particular, the paper focuses on how contract design is used to increase the benefits from risk-sharing by alleviating enforcement issues. The paper focuses on two types of contracts found in rural Ethiopia: one with considerable savings at the group level and regular payments unrelated to shocks, and one without savings and payments to members after they experienced a mortality shock. Consistent with theoretical predictions and simulation results, study findings indicate that:

  • Both contracts co-exist in villages;
  • Contract choice is related to social cohesion;
  • On average, death shocks are well-insured, but catastrophic shocks are not.

About this Publication

By Bold, T. & Dercon, S.
Published