Risk preference or financial literacy? Behavioural experiment on index insurance demand

We use unique cross-sectional household data from Ethiopia to
investigate the effect of risk preference, financial literacy and other
socio-economic characteristics on demand for index insurance. We measure
risk preference based on survey experiments using lottery choice game
with real monetary prizes. First, we find no evidence of risk aversion
on demand for index insurance. Second, we find positive impact of
financial literacy on purchasing insurance. Third, relaxing liquidity
constraint enhance the take-up of insurance. Finally, demographic and
village characteristics have little role in the decision to uptake
insurance. These findings have implications on product design and
marketing strategies. The product design should focus on ways that
better account for liquidity constraint of the household. Interventions
that strengthen efforts in provision of financial literacy programmes
are worthy. Our results are robust to changes in specification and
estimation method.