91228 Finance & PSD Impact OCT 2014 The Lessons from DECFP Impact Evaluations ISSUE 31 Our latest note discusses the results of a pilot of an innovative insurance product, which aims to protect small firms from macroeconomic and political risk that might inhibit them from investing. Piloting Macroinsurance for Microenterprises in Post-Revolution Egypt Matthew Groh and David McKenzie Policy uncertainty and then 0.5 percent of the value of this new macroeconomic instability are the two most loan. If a shock covered by the insurance common constraints to firm growth listed by occurred during the loan period, the payout firms in developing countries in the World would be two months of loan principal Bank’s Investment Climate Surveys, ranking installments – one to ABA to cover that ahead of taxes, regulation, corruption, and month’s loan, and one to the client to give access to finance. Faced with such them cashflow to compensate for potential uncertainty, firms may be reluctant to make loss in business from the shock. If a second new investments or hire new workers, covered shock occurred in a subsequent choosing to wait and see how their economy month, the EPP would pay out an additional evolves. This concern may be particularly month’s loan installment. important for firms in much of the Middle- The insurance would pay out if any East and North Africa regions, which have of the following shocks occurred: faced dramatic increases in political and  The Cairo Alexandria stock exchange macroeconomic instability in the context of being suspended for 5 days or more; the Arab Spring.  A curfew of 14 hours or more imposed in Alexandria for 5 or more business Macroinsurance for microenterprises Insurance is a natural financial days; instrument to help protect against risk. There  Monthly CPI inflation rising to 4% or has been a lot of attention devoted to more. developing insurance products for farmers,  The official price of subsidized Benzene but to our knowledge, hardly any attention gasoline rising above a specified level. to developing insurance instruments that can protect other types of firms against the risks  The official price of subsidized LPG gas they face. rising above a specified level. We worked with Alexandria Business Association (ABA), Egypt’s These shocks were identified through largest microfinance organization, to market testing as salient in the wake of the develop and pilot an innovative insurance revolution, and likely to harm business product to help protect its clients against the owners either directly, or because of what uncertainty they faced in the aftermath of their trigger would likely signal about the January 25, 2011 revolution which economic and political chaos in the country. ended almost thirty years of rule by President Hosni Mubarak. Piloting macroinsurance via a The insurance product was designed randomized experiment for microfinance clients who were deciding We worked with a sample of 2,961 whether or not to take a new 12 month loan microfinance clients, who were finishing from ABA. The cost of the insurance was one loan and about to decide on taking out a Do you have a project you want evaluated? DECRG-FP researchers are always looking for opportunities to work with colleagues in the Bank and IFC. If you would like to ask our experts for advice or to collaborate on an evaluation, contact us care of the Impact editor, David McKenzie (dmckenzie@worldbank.org) new loan between April and September insurance protects firms when shocks 2012. These were randomly split into two do occur. equal sized groups: a treatment group who were offered the insurance product, and a Discussion and Policy Implications control group who were not. The lack of effect appears to be These firms were microenterprises, because these microenterprises seldom make with most having no paid workers. Half fixed capital investments anyway – their were in retail, the rest in manufacturing or loans largely went to working capital. Since services. Median monthly profits were these investments are short-term and easily around US$200, with an average loan size of adjusted, they are less affected by around US$800. uncertainty. Our results do suggest that despite firms complaining uncertainty is a constraint to business growth, this Results uncertainty does not appear to be preventing  Demand for the insurance product microenterprises from making profitable was relatively high: 36.7% of the investments in machinery and equipment. firms in the treatment group While the product did not change the investment behavior of firms, the demand purchased it. The insurance could for the product suggests firms might still only be purchased along with a new value the protection it could provide when loan – 55% of those taking a new shocks do occur. The product could be more loan purchased the insurance. valuable for SMEs, who may be more likely  However, the insurance had no to be considering lumpy capital investments impact on firm investment behavior. that they defer because of uncertainty. Insurance penetration is very low in Treated firms were no more likely to Egypt, with regulations inhibiting the take a loan, did not take larger loans, development of the sector. As a result, many and were no more likely to use their firms have little understanding of the loan to make new capital concept of insurance. This unfamilarity with investments. The sample is relatively insurance does not appear to explain the large and confidence intervals small results of our study, but does make it hard to around zero, so this lack of effect is launch new products and build an understanding of how they work. Given the not a result of low statistical power. enormous volatility in incomes for  As a result profits and sales did not microenterprise owners in developing increase, if anything there is some countries, we hope the lack of impact of our evidence revenues fell. product in this pilot does not deter further  The insurance did not pay out policy and research efforts to develop better (several of the events in Egypt came ways to help insure urban microenterprises against some of this risk. close to triggering payout, but did not exceed the thresholds). As a result, we can not see how much this For further reading see: M. Groh and D. McKenzie (2014) “Macroinsurance for Microenterprises: A randomized experiment in post-revolution Egypt”, World Bank Policy Research Working Paper no. 7048. Recent impact notes are available on our website: http://econ.worldbank.org/programs/finance/impact