Evolutionary dynamics of collective index insurance
- 346 Downloads
Index-based insurances offer promising opportunities for climate-risk investments in developing countries. Indeed, contracts conditional on, e.g., weather or livestock indexes can be cheaper to set up than conventional indemnity-based insurances, while offering a safety net to vulnerable households, allowing them to eventually escape poverty traps. Moreover, transaction costs by insurance companies may be additionally reduced if contracts, instead of arranged with single households, are endorsed by collectives of households that bear the responsibility of managing the division of the insurance coverage by its members whenever the index is surpassed, allowing for additional flexibility in what concerns risk-sharing and also allowing insurance companies to avoid the costs associated with moral hazard. Here we resort to a population dynamics framework to investigate under which conditions household collectives may find collective index insurances attractive, when compared with individual index insurances. We assume risk sharing among the participants of each collective, and model collective action in terms of an N-person threshold game. Compared to less affordable individual index insurances, we show how collective index insurances lead to a coordination problem in which the adoption of index insurances may become the optimal decision, spreading index insurance coverage to the entire population. We further investigate the role of risk-averse and risk-prone behaviors, as well as the role of partial correlation between insurance coverage and actual loss of crops, and in which way these affect the original coordination thresholds.
KeywordsIndex insurance Collective action Evolutionary game theory Non-linear returns
Mathematics Subject Classification91-XX 91A22 91A06 91A40 91B18 91B30
The authors would like to dedicate this paper to Mats Gyllenberg on the occasion of his 60th birthday. We also thank Avinash Dixit for his insightful comments. J.M.P. and F.C.S. acknowledge financial support from FCT-Portugal through Grants EXPL/EEI-SII/2556/2013, PTDC/MAT-STA/3358/2014, and PTDC/EEI-SII/5081/2014, and by multi-annual funding of CBMA-UM and INESC-ID (under the Projects UID/BIA/04050/2013 and UID/CEC/50021/2013) provided by FCT-Portugal. S.A.L. acknowledges financial support from National Science Foundation Grants EF-1137894, GEO-1211972 and Project “Green Growth Based on Marine Resources: Ecological and Socio-Economic Constraints (GreenMAR)”, funded by Nordforsk.
Compliance with ethical standards
Conflict of interest
The authors declare no competing financial interests.
- Arrow K (1963) Aspects of the theory of risk bearing, YRJO Jahnsson lectures, also in 1971. Essays in the theory of risk bearing. Markham, ChicagoGoogle Scholar
- Barnett BJ, Black JR, Hu Y, Skees JR (2005) Is area yield insurance competitive with farm yield insurance? J Agric Resour Econ 30(2):285–301Google Scholar
- Barrett CB, McPeak JG (2006) Poverty traps and safety nets. Springer, BerlinGoogle Scholar
- Carter MR, Galarza F, Boucher S (2007) Underwriting area-based yield insurance to crowd-in credit supply and demand. Sav Dev 31(3):335–362Google Scholar
- Clarke DJ (2011) A theory of rational demand for index insurance. University of Oxford, Discussion paper Series, Number, Department of Economics 572Google Scholar
- Clarke D, Kalani G (2011) Microinsurance decisions: evidence from Ethiopia, University of Oxford, PhD ThesisGoogle Scholar
- Clarke D, Das N, de Nicola F, Hill RV, Kumar N, Mehta P (2012a) The value of customized insurance for farmers in rural Bangladesh. Research paper, International Food Policy Research Institute (IFPRI)Google Scholar
- Clarke DJO, Mahul K, Rao N, Verma N (2012b) Weather based crop insurance in India. World Bank Policy Research, Working Paper 5985Google Scholar
- De Bock O, Gelade W (2012) The demand for microinsurance: a literature review. ILO Microinsurance Innovation Facility Research Paper, Number 26Google Scholar
- Gaurav S, Cole S, Tobacman J (2011) Marketing complex financial products in emerging markets: evidence from rainfall insurance in India. J Mark Res 48(SPL):S150-S162Google Scholar
- Hess U, Skees J, Stoppa A, Barnett B, Nash J (2005) Managing agricultural production risk: innovations in developing countries. Agriculture and Rural Development (ARD) Department Report (32727-GLB)Google Scholar
- Osgood DE, McLaurin M, Carriquiry M, Mishra A, Fiondella F, Hansen JW, Peterson N, Ward MN (2007) Designing weather insurance contracts for farmers in Malawi, Tanzania and Kenya: final report to the Commodity Risk Management Group. Agriculture and Rural Development, World BankGoogle Scholar