Microinsurance is one of those maddening products in development circles because it makes perfect sense (so much so that its a bit surprising it hasn’t evolved on its own) but the existing offerings haven’t had much success—take-up rates are typically very low.
Chris Udry of Yale presented an experiment in Ghana that tackles these questions. The experiment was based on a large question: why do farmers underinvest in their farms? Is it that they lack investment capital or that they are risk averse? To take this on, the program provided some farmers with rainfall insurance, some with cash grants, some with both and of course a control group. Bucking the trend of small impacts, the study found significant impacts on farm investment: farmers in the treatment group bought more fertilizer, planted more acreage, and hired more labor. Unsurprisingly come harvest time they had higher yields and more income. They missed fewer meals and their children missed less school.
With such large and positive impacts you would expect that the farmers would be interested in buying insurance for the following year—and they were. But subsidizing a year of insurance to generate clients isn’t a great way to scale microinsurance. So Udry’s team looked at demand among friends, neighbors and acquaintances of the participants to see if word spread and generated demand beyond the original participants. They found that demand did spread along social networks with those who knew multiple participants more likely to be interested in purchasing insurance, particularly if they knew someone who had gotten an insurance payout. But the really exciting thing about Udry’s research is the significant benefits participants achieved.For farmers, agriculture shocks are among the most pernicious. They cause farmers, ex ante, to invest in lower yielding options that are more hardy (e.g., cassava grows everywhere and under very harsh conditions) but provide less income. For those that take a bet on higher yielding crops like coffee or tea, one bad season can cause a family to go hungry and curtail key development expenses.