Perception and protection: The effect of risk exposure on demand for index insurance in Mongolia

Abstract

This study provides novel evidence on how risk exposure shapes demand for index-based weather insurance. The focus is on Mongolia, where index-based livestock insurance is offered as a commercial product to pastoralists threatened by extreme weather events that cause high livestock mortality. The analysis draws on district-level data covering the whole country, spanning eleven years. Our study exploits a particular feature in the design of the Mongolian index insurance: The insurance sales period predates the payout period of the previous insurance season, which allows us to separate the effects of risk exposure from the income effects of payouts. Results from a two-way fixed effects model show that demand for index insurance increases in areas exposed to adverse winter conditions during the insurance sales period, when pastoralists have to decide about purchasing insurance coverage for next year's winter. We argue that results are best explained by availability bias, with households adapting their risk perception in response to adverse weather conditions.