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The effectiveness of index-based micro-insurance in helping smallholders manage weather-related risks

What do we want to know?

This review investigates the effectiveness of weather insurance and area yield-based crop insurance in helping smallholders manage weather-related risk in low- and middle-income countries. The review focuses on understanding the determinants of demand and quantifying the impact of such products on household investment decisions and overall well-being.

Who wants to know and why?

The report was produced with financial support from the UK Department for International Development, and will be of interest to aid agencies, both governmental and non-governmental, bodies supplying or considering micro-insurance, and potential recipients.

What did we find?

Caution must be observed when generalising from this small number of studies to the diverse contextual environments of the developing world; however, the synthesis identifies some notable patterns:

  • Higher liquidity and income levels available to the household were found to be positively associated with take-up. A lower level of income diversification appears positively associated with insurance demand.
  • Financial literacy is positively correlated with interest in insurance.
  • Familiarity and trust in the external agent or organisation selling the insurance product and trust in the insurance are also associated with higher levels of take-up.
  • Higher levels of yield and rainfall variability are associated with greater interest in index-based insurance products.
  • Higher levels of risk aversion are associated with lower interest in index-based micro-insurance.
  • A preference for group-based insurance policies over household-based policies was noted in one study.
  • It was shown that focusing promotional materials on vulnerability, group/family responsibilities or network-based trust can affect the demand for insurance.
  • One study found that insurance cover was associated with greater purchases of fertiliser, and that having to pay for the insurance product, rather than it being offered free, increased the impact on fertiliser purchases.

How did we get these results?

A wide-ranging search of databases, journals and relevant websites was supplemented by information from experts in the field of banking and financial services for the poor. After applying a series of targeted inclusion criteria, the resulting 13 studies were analysed using a realist synthesis approach.

What are the implications?

Several non-price factors, including financial literacy, trust and liquidity appear to affect demand for index-based micro-insurance products, and there is some evidence that access to index-based insurance increases the use of agricultural inputs, such as fertiliser.

In terms of policy, the review offers cautious encouragement to continue pilots and programmes based on index-based insurance. Piloting group-based micro-insurance products, which have the potential to ease both informational and liquidity constraints, might increase take-up rates. Also, combining the roll-out of insurance products with agricultural extension programmes and financial literacy training is likely to increase both take-up and the impact of the products sold.

There are substantial evidence gaps in the field, and in particular, there is an urgent need for evaluations analysing the take-up and impact of marketed products. Research on the impacts of index-based insurance on economics and agricultural outcomes should be the key priority.

This report should be cited as:

Cole S, Bastian G, Vyas S, Wendel C, Stein D (2012) The effectiveness of index-based micro-insurance in helping smallholders manage weather-related risks. London: EPPI Centre, Social Science Research Unit, Institute of Education, University of London.

ISBN: 978-1-907345-35-7

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