Understanding Insurance
Index insurance can only reduce risk, reduce distortions in farmer behavior and deepen agricultural financial markets if there is sustained and informed demand for the insurance. However effective demand for insurance may be weak among a population never before insured. Insurance is an intangible good that offers stochastic benefits: sometimes insurance delivers an indemnity payment and sometimes it does not. If farmers misunderstand or underestimate the value of the stochastic benefits of even a well-designed insurance contract, then there will be little demand for the contract and little impact on farmer behavior.
Unfortunately, the complexity of index insurance contracts stands as a potential barrier to creating effective demand. These contracts present particular problems for populations that have little experience with formal insurance, much less complex index-based contracts. Progress requires innovative efforts to enhance the understanding and financial literacy of the people that might purchase and benefit from index insurance.
The I4 has pioneered the development and use of simulation games to help never before insured populations understand insurance.
- M. R. Carter, Barrett C. B., Boucher C., Chantarat S., Galarza S., McPeak J., Mude A. G. and Trivelli C. (2008) "Insuring the never before insured: Explaining index insurance through financial education games."
- Travis J. Lybbert, Francisco Galarza, John McPeak, Christopher B. Barrett, Steve Boucher, Michael R. Carter, Pin Chantarat, Aziz Fadlaoui, Andrew Mude, "Dynamic Field Experiments in Development Economics: Risk Valuation in Morocco, Kenya and Peru," July 2009
- John McPeak, Sommarat Chantarat, Andrew G. Mude, "Explaining Index Based Livestock Insurance to Pastoralists," Agricultural Finance Review 70(3):333-352.
