Targeting weather insurance markets

Abstract

The suitability of insurance products often depends greatly on individual circumstances. This paper examines the challenges of heterogeneity in a relatively new product, weather‐indexed insurance. This index insurance product has been launched in over a dozen countries, with the goal of enabling households engaged in agricultural activity a means to manage risk. Using data from a large‐scale field experiment, we build and calibrate a model which accounts for household investment decisions, including the scope for self‐insurance via labor markets to (risky) wage work. Our results show that insurance is most valuable to households with reduced access to wage labor, or to those who face wages that are sensitive to rainfall risk. These findings have important implications for areas where index insurance is most effective.

Is Agricultural Insurance Fulfilling Its Promise for the Developing World? A Review of Recent Evidence

“…This group is more exposed to market and production risks than subsistence-oriented farmers, but they may have savings to cope with bad years and have better access to credit. Many of these households have nonfarm sources of income, protecting their income from agriculturally related losses and reducing their need for insurance (Mukherjee et al 2021). Because of their links to value chains, they may have access to insurance through a range of financial service providers and agribusinesses, where insurance policies may be bundled with services such as credit and modern inputs.…”

Linear pooling of potentially related density forecasts in crop insurance

“…Fairly direct applications could be made to cases of index insurance, whether for agricultural production or otherwise (Awondo & Kostandini, 2022; Mukherjee et al, 2021). Weather ultimately underlies the major variations in crop yields suggesting that pooling information on weather underlying index insurance could result in more accurate rating.…”

The effect of weather index insurance on social capital: Evidence from rural Ethiopia

“…Previous studies show that despite heavy promotion, demand for index insurance is still very low due to both price and nonprice factors. Index insurance take‐up decreases with price (Collier, 2019; Karlan et al, 2014; Mobarak & Rosenzweig, 2012), risk aversion (Hill et al, 2013), liquidity constraints (Belissa et al, 2019; Giné et al, 2008), basis risk (Clarke, 2016; Collier, 2019; Giné et al, 2008; Karlan et al, 2014), high wages in local labor markets and wages less sensitive to rainfall shocks (Mukherjee et al, 2021), lack of trust on the insurer (Belissa et al, 2019; Cole et al, 2013; Karlan et al, 2014), households' poor financial literacy (Awel & Azomahou, 2015) and enrollment in government social protection programs (Duru, 2016), but increases with subsidy, high fertilizer use (McIntosh et al, 2013) and wealth (Giné et al, 2008; Hill et al, 2013). In spite of the low average take‐up, there is some evidence of its impact on agricultural investment and welfare.…”