Michael Carter Index Insurance & Agricultural Development

The Potential Impacts of Agricultural Insurance onAgricultural Development & Rural LivelihoodsMobilizing a CGIAR Agricultural Insurance Community

Michael R Carter

Department of Agricultural & Resource EconomicsBASIS Assets & Market Access Research Program &

I4 Index Insurance Innovation InitiativeUniversity of California, Davis

http://basis.ucdavis.edu

January 19, 2014

M.R. Carter Impacts of Insurance

Potential Impacts of Insurance

1 Relax risk & capital constraints to the adoption of ’better’technologies

1 Cotton in West Africa2 Grains in Ghana3 Drought tolerant maize

2 Protect assets, both current & future (IBLI)1 Index based livestock insurance (IBLI) in Kenya impacts on

asset protection2 Why IBLI impacts on consumption smoothing protect future

assets3 Incentivize productive asset accumulation over time

1 Insurance & asset portfolios in theory4 Facilitate transitions to more stable systems

1 Investing in disaster risk reduction (DR)2 Transition to complete financial services

5 Will not discuss challenges of (index) insurance


Risk & Capital Constraints

Know that risk is directly costly

Income smoothing by shifting from riskier to less riskyactivities or portfolios of activities

Deepens capital constraints also

self-finance cut off by holding of ’unproductive’ assetsexternal finance (credit) discouraged, especially by correlatedrisk

Reducing risk via insurance that effectively transfers riskshould address all three problemsNote also that when twined with technology adoption, willmake insurance relatively inexpensiveBut does it really work?


Risk & Capital ConstraintsWest African Cotton (Mali & Burkina)

Farmers pursue a diversified production strategy of growingtheir own food plus some cottonValue chain credit via group loans, but consequences of defaultare substantial (informal collateral)Joint liability itself discourages investment as the more afarmer produces, the more likely that some of his output willbe ’taxed’ away to pay for others in the groupMany report growing less cotton then they otherwise would, orby reducing financial risk exposure by investing less in the cropResult is that risk keeps these farmers poorer than they needbe given the economic opportunities available to them


Risk & Capital ConstraintsWest African Cotton (Mali & Burkina)

Elabed et al. (preliminary) findings from MaliIdentification strategy

Insurance “perception”Insurance expands area planted by 20% and input use by10-20%Adding up development impacts?


Risk & Capital ConstraintsMaize Ghana

Karlan et al. findings from Ghana

Identification via random offers of insurance at variable pricesExtensive marginIntensive marginCapital versus insurance–which is the binding constraint?Adding up development impact?


Risk & Capital ConstraintsEx ante analysis of DT Maize-Insurance Bundle

Climate change projections suggest greater variability andincreased drought risk in some of the world’s poorest regionsDrought tolerance is a longstanding breeding objective. . . withnew tools, renewed promise and high hopes

Massive private & public sector investmentsPublic-private partnerships (e.g., Drought Tolerant Maize forAfrica, etc.)

But will DT maize be adopted?

Learning challenges (sometimes better than traditionalcultivars as drought pressure increases, sometimesnot–contrast with BT)Relatedly, highly imperfect protection for the farmer

Let’s look at DT’s insurance properties and the potentialcomplementarity of financial & agronomic technologies





Off to design a 2x2 experimental designNote that this approach might generally be used for anyimproved technology or practice


Protect Present & Future AssetsAfter the drought impact analysis of IBLI

IBLI contract based on a satellite readings of vegetative coverNDVIContract designed around livestock mortality data which mapsNDVI into predicted mortalityIn 2011, a major draught led to predicted mortality rates inexcess of 30% and an insurance payoutAnalyzed self-reported data on changes in coping strategywhen insuredIncomplete RCT, rely on instrumental variables





Asset protection role of reduced asset sales obviousBut, perhaps more importantly are impacts on consumptionsmoothing


Incentivize Asset Accumulation over Time

Similar to how insurance can make risk taking prudential foruptake of risky technologies, so too it might incentivizeaccumulation of higher yielding but riskier assets over timeLatter effect can be especially strong in the presence ofasset-based poverty trapsNo empirical evidence (?) on this phenomenon, but a look atex ante theoretical analysis may be instructive






Facilitate Transitions to More Stable Systems

Do not want to create impression that insurance/risk transferis the only instrumentRisk reduction investments and more complete packages offinancial instruments may dominate a strictly insurancestrategyEven if this observation is true, risk transfer instruments mayhave a role to play as part of a transitional strategy


Thank you!

Michael Carter Index Insurance & Agricultural Development

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carterimpacts of insurance

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