In this study, AMA Innovation Lab researchers play a series of incentivized laboratory games with risk-exposed cooperative-based coﬀee farmers in Guatemala to understand the demand for index-based rainfall insurance. They show that insurance demand goes up as increasingly severe risk makes insurance payouts more partial (payouts are smaller than losses), but demand is adversely eﬀected by more complex risk structures in which payouts are probabilistic (it is possible that a shock occurs with no payout).
They use numerical techniques to estimate a ﬂexible utility function for each player and consequently can put exact dollar values on the magnitude of the behavioral response triggered by probabilistic insurance. Exploiting the group structure of the cooperative, the researchers investigate the possibility of using group loss adjustment to smooth idiosyncratic risk.
The results suggest that consumers value probabilistic insurance using a prospect-style utility function that is concave both in probabilities and in income, and that group insurance mechanisms are unlikely to solve the issues of low demand that have bedeviled index insurance markets.