Contract Design in Insurance Groups

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.