Coping with Shocks: Impact of Insurance Payouts on Small-Scale Farmers

Abstract

Weather insurance is regarded as a powerful tool to protect small-scale farmers from the economic impacts of natural disasters. In cases in which insured farmers suffer a loss, insurance payouts mitigate the financial consequences that otherwise could have forced them to apply disruptive coping strategies. This paper analyses the effects of payouts of yield insurance in Colombia on small-scale tobacco farmers. Two questions are raised: were the payouts made consistently after shocks and how did the payouts affect the ex post coping strategies of the beneficiaries? The data indicate a significant overlap in household losses between insured farmers who did and those who did not receive payouts, even though the insurance indemnified the main risks of the main income sources. Exploring the overlap to match the farmers of the two groups, it is suggested that the beneficiaries were better equipped to protect their resources, including assets and savings, after shocks.

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Notes

  1. 1.

    Dercon (2004).

  2. 2.

    Rodriguez-Oreggia et al. (2013).

  3. 3.

    Datt and Hoogeveen (2003).

  4. 4.

    Dercon et al. (2005).

  5. 5.

    World Bank (2013).

  6. 6.

    Carter and Maluccio (2003); Skoufias (2003); Macours (2013).

  7. 7.

    IPCC (2014).

  8. 8.

    Samson et al. (2011).

  9. 9.

    Carter et al. (2007).

  10. 10.

    Eling et al. (2014).

  11. 11.

    Janzen and Carter (2013).

  12. 12.

    Akotey and Adjasi (2014).

  13. 13.

    Dietrich and Ibanez (2015).

  14. 14.

    Cai (2013).

  15. 15.

    IFPRI (1986); Skees et al. (1999); Dercon et al. (2008); Clarke and Grenham (2013).

  16. 16.

    The numbers change for other departments, and the formula presented applies to tobacco farmers in Santander. In 2010, the production cost per hectare was estimated to be 6.7 million COP for burley tobacco in the research region.

  17. 17.

    According to administrative data, about 28 per cent of the insured contracts in 2009 and 2010 were indemnified compared with 35 per cent in the sample. The results are robust to the use of sampling weights.

  18. 18.

    The administrative data could only be merged if the survey respondent coincided with the tobacco contract holder.

  19. 19.

    Note that the number of observations differs from the previously cited figures because of missing responses for some variables, reducing the observations of all the variables in the multivariate regressions.

  20. 20.

    There were a total of 202 and 295 insured farmers in 2009 and 2010. Note that the observations in Table 1 use multivariate regressions, leading to a lower number of observations due to missing observations for some variables.

  21. 21.

    Other strategies included taking children out of school and asking the public administration for help, but there were too few positive observations (3) to be considered in the analysis. Due to missing loss responses and an initial coding error in the survey, the number of observation is lower compared with Table 1. Households with missing coping strategy responses are not systematically different in terms of observable characteristics.

  22. 22.

    Skoufias (2003).

  23. 23.

    For the identification of the equations, shocks that were not covered by the insurance and dummies representing the tobacco company technicians who are responsible for forwarding claims to the insurance company are used.

  24. 24.

    Caliendo and Kopeinig (2008).

  25. 25.

    The results of the selection equation can be found in Table 7.

  26. 26.

    Chiputwa et al. (2015).

  27. 27.

    Note that the estimation is suitable for nearest neighbour matching without replacement, which led to slightly different coefficients compared with the results of the main estimations.

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Acknowledgments

This article benefited greatly from suggestions by Marcela Ibanez and Stephan Klasen and comments received at the brown bag seminar of the chair for Social Policy and Education of the University of Stellenbosch, the Development Economics seminar of the University of Göttingen, the AEL conference in Munich (2013), and the 2nd International Microinsurance Workshop in Munich (2014).

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Correspondence to Stephan Dietrich.

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Dietrich, S. Coping with Shocks: Impact of Insurance Payouts on Small-Scale Farmers. Geneva Pap Risk Insur Issues Pract 42, 348–369 (2017). https://doi.org/10.1057/s41288-016-0035-y

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Keywords

  • coping strategies
  • insurance
  • natural disasters
  • risk management
  • Colombia