Transcript Prof.-Chatt._Rainfall-Insurance

CMF-CAB Conference on Microfinance, January 16-17th
“Optimizing Microfinance Distribution Channels”
Results from Rainfall Insurance Studies in Gujarat and
Andhra Pradesh
Raghabendra Chattopadhyay
Indian Institute of Management -Calcutta
1
Based on results from :
“Barriers to Household Risk Management: Evidence
from India” working paper
Shawn Cole
HBS
Xavier Gine
World Bank
Jeremy Tobacman
Wharton
Petia Topalova
IMF
Robert Townsend
MIT
James Vickery
NY Fed
2
This paper:

Tests competing theories of household
insurance demand to understand the
barriers to adoption of a specific risk
management product

Using a set of randomized experiments
◦ In Andhra Pradesh, with BASIX
◦ In Gujarat with SEWA, an NGO
Motivation

Why don’t more households participate in formal
markets when available?

We study participation in a rainfall insurance
product offered to rural Indian households.

The context is one in which benefits of risk
diversification appear to be high. Indian monsoon
risk is an aggregate local shock, but uncorrelated
with global financial markets

80% of respondents cite weather shocks as a major
risk faced by household.
What do we do?

Design of treatments is guided by potential barriers to
adoption:

Neoclassical (standard)
◦ Transaction Costs
◦ Credit constraints
◦ Price / Expected value

Non-standard
◦ Financial literacy / complexity
◦ Trust
◦ Framing
Research Questions

What are the determinants of adoption?

What is the impact of insurance on
investment, risk-sharing and consumption?
Outline of Talk
Product Description
 Sample and Summary Statistics
 Patterns of Take-up
 Experimental Design

◦ Andhra Pradesh
◦ Gujarat
Results
 Conclusions

Product Description

Financial derivative on rainfall
◦ Basis is rain measured at rainfall station
◦ Sold within 20 Km of station
◦ Payout based on amount of rainfall

First sold in India in 2003 (Andhra Pradesh)

Designed by World Bank and ICICI
Product Description

Coverage during Kharif season (monsoon)

Payout designed to correlate to economic loss from
drought / flood

Limitations on how complex product can be
◦ Transparency
◦ Pricing

ICICI Policies (Gujarat in 2006 and AP in all years)
◦ Policy starts after 20-50 mm accumulated
◦ Three phases: sowing, flowering, and harvest
◦ Each phase pays out or not separately
Product Description

Key benefits:
◦
◦
◦
◦
No adverse selection (except maybe temporal)
No moral hazard
Easy to price
Divisible: policies as cheap as $1.50, promising to
pay up to $12
◦ Easy to purchase (private company, not
government)
◦ Fast claim settlement
Product Description

Key limitations:
◦ Basis Risk
 Water needs perhaps not linear
 Rain in plots may differ from rain at gauge
 Non-weather related risks: pests, prices, etc
◦ Complicated
◦ Potentially expensive
 Expected payout ranges from 30%-95% of premium cost
◦ Designed as catastrophic insurance: Pays 1 in 9
years, but max payout (return of 900%) is triggered
1 in 100 years.
◦ Limited re-insurance market
Sampling

Gujarat (Chattopadhyay,Cole,Tobacman, Topalova)
100 villages in 3 districts, half offered insurance
◦ Non-random sample selection. In each village:
5 at random from SEWA member lists
 5 with significant bank account balances
 5 identified as likely to adopt insurance
◦ SEWA (NGO) sells ICICI & IFFCO policies
◦ Low levels of human capital and financial literacy
◦ Relatively poor, many landless laborers
Sampling

Andhra Pradesh (Gine,Townsend,Vickery)
◦ 1,000 households from 37 villages in two districts of
Andhra Pradesh
◦ Stratified sample after village enumeration on purchase
of insurance in 2004 and marketing meeting attendance
◦ BASIX (MFI) sells ICICI/Lombard insurance
◦ Experiment conducted by ICRISAT staff
◦ Relatively wealthy, groundnut and castor farmers
Summary Statistics
Land Ownership
Own Land
Amount of Land owned (bigha=.5 acres)
Number of plots
HH had credit in May 2006 (1=Yes)
AP
100%
13.0
1.79
89.8%
Gujarat
48%
6.03
1.64
71.8%
AP sample more likely to own land and have
higher landholdings
 SEWA intentionally markets to landless
laborers

Summary Statistics
Assets
Tractor
Tresher
Bullocks
Furniture
Bicycle
Motorcycle
Sewing Machine
Elec. Appliances
Telephone
AP
4.5%
0.6%
23.4%
88.0%
46.5%
14.7%
6.6%
63.7%
23.0%
Average of Comparable Wealth
2.71Index


Gujarat
2.21%
0.80%
4.28%
98.40%
32.24%
7.83%
5.81%
64.62%
13.83%
2.30
Gujarat is a richer state than AP
Yet by asset measure, AP sample seems richer
Summary Statistics

Risk Aversion measured through choice of lotteries
(Binswanger, 81)

Discount rates through hypothetical questions
◦ Would you prefer to receive Rs X today or Rs Y one month
from today?

Financial Literacy measured using questions from DHS
(Lusardi and Mitchell, 2006), on interest, inflation, and risk
diversification (four questions)

Knowledge of insurance through hypothetical question
◦ Imagine that the trigger was X and actual rainfall Y. Would you
receive a payout, and if so how much?

Knowledge of millimeters
◦ Starting from [thick black line], can you show me how far
60mm is?
Summary Statistics
AP
--
Gujarat
0.34
Average Score, Math Questions
--
0.62
Average Score, Probability Questions
--
0.72
Averag Score, Insurance Questions
0.80
0.68
Knowledge of mm
0.21
--
Risk Aversion
0.57
0.46
Average Score, Financial Literacy
Correlates of Insurance Purchase
Utility function
Risk aversion
Subjective discount rate
Beliefs about return on insurance
Above average expected monsoon rain (normalized)
Basis risk
Pct. of cultivated land that is irrigated
Pct cultivated land in castor or groundnut
Wealth, income and credit constraints
Number of plots
Logarithm of wealth
Logarithm of Monthly Per Capita Expenditures
Has savings account
HH
had credit
May constrained
06 /June 04 in
(1=Yes)
Household
wasincredit
July 06 / June 04
(1=Yes)
AP
Gujarat
--0
--0
0
---
+
0
++
0
++
0
0
0
--+++
0
0
+
0
18
Correlates of Insurance Purchase
AP
Familiarity with insurance and BASIX
Average insurance payouts in the village 2004 and 2005
HH bought weather insurance in 2004 (1=Yes)
Financial literacy
Probability skill
Insurance skills (normalized)
Household has other insurance (1=yes)
Don't know Provider (1=Yes)
Technology diffusion / networks
HH belongs to a BUA / WUG group (1=Yes)
Number of groups that the household belongs to
Demographic Characteristics
Scheduled Caste or Tribe
Muslim
Household head's gender (1=male)
Log of household head 's age
Log of Household Size
Highest education level is higher or equal to secondary school
Gujarat
+++
+++
+++
+++
---
++
+++
0
+++
0
+
0
0
0
0
0
0
++
+++
0
0
0
19
Experiments

Andhra Pradesh
◦ Visit: Household is visited by team
◦ Endorsement:Visit is endorsed by BASIX
representative
◦ Education: Additional training converting mms
into soil moisture
◦ Liquidity: Households receive either Rs 25 or Rs
100

Gujarat
◦ “Subtle” Marketing Manipulations
◦ Random discounts
AP Results

Door-to-door visit
◦ Visit affects take-up substantially
 Households are 13 percentage points more likely to
purchase insurance
◦ Hard to reconcile with transaction costs
story: BASIX representative available in village
on weekly basis
AP Results

Endorsement
◦ Increases take-up by six percentage points
◦ Not a matter of transactions costs as BASIX
representative is available on weekly basis in
village
AP results

Education Module
◦ Only 10 percent of households understand link
between mm to soil moisture, yet policy
triggers are set in mm
◦ No effect
◦ Caveats
 Visits with module were only 2 minutes longer than
visits without. (Average visit 25 min)
 Recipients were no more likely to understand mm after
2 months.
AP Results

Liquidity Constraints
◦ Cash on-hand single most important
determinant of insurance participation
◦ Survey compensation of Rs. 100 vs. Rs. 25
increases take-up by 34 percentage points,
against mean of 24 percent
Gujarat Design

30 of 99 villages treated in 2006

20 more villages treated in 2007

Marketing manipulations: three (non-random)
groups selected
◦ “Old” treatment villages: flyers
◦ “New” treatment villages:
 Surveyed households: video treatments
 Non-surveyed households: video treatment

Within groups, marketing treatments randomly
assigned
Gujarat Design: Flyers

Individual vs. Group
◦ Individual: Purchase insurance to protect
yourself during drought
◦ Group: Purchase insurance to ensure you can
help your friends and family in case of
drought

Religion
◦ Figure in flyer has Muslim / Hindu / no name
◦ Standing in front of a Mosque / Temple /
Building
Gujarat Design
Video players, $100/each
 Allows more control of message

27
Gujarat Design:Video

Video Treatment: Surveyed Households (N=315)

Payout Framing [Asian Disease]:
◦ Positive: “This policy would have paid out 2 of the past 10 years”
◦ Negative: “This policy would have not paid out 8 of the past 10
years”

Insurance Framing:
◦ Security: ”Purchase insurance to ensure that you are safe and
secure” with picture of lush fields and happy farmers
◦ Vulnerability: ”Purchase insurance to avoid suffering in case of
drought” with picture of dry land and forlorn farmers

Video treatments reinforced with fliers
Gujarat Design:Video

Video Treatment: Non-Surveyed Households
(N=1098)

Peer vs. Authority: The product is
introduced by a teacher (authority) vs.
a fellow SEWA member (peer)

SEWA Brand: Does SEWA's brand
figure prominently in the video?
Gujarat Design:Video
Price Variation: For all video treatments
 Randomly assigned in advance

◦ 40% Rs. 5
◦ 40% Rs. 15
◦ 20% Rs. 30
30
Gujarat Design
Video Treatments
Sample Size
Total
Surveyed
Non-Surveyed
1413
315
1098
Sewa Association
Peer Endorse
2/10 yes
Vulnerability Frame
0.62
0.59
0.52
0.11
1.00
1.00
0.50
0.51
0.51
0.47
0.52
0.00
Discount==5
Discount==15
Discount==30
0.42
0.38
0.19
0.48
0.34
0.18
0.41
0.40
0.20
2,391
0.52
0.35
0.35
-
-
Flyer Treatments
Sample Size
Individual
Neutral
Muslim
Gujarat: Summary Statistics
% Take-up
2006
2007
Anand
Ahmedabad
Patan
Total
14%
18%
34%
23%
40%
17%
47%
34%
Buy in '06
No
Yes
No
Yes
Take-Up
Premium (Rs.)
2006
2007
Premium (USD)
2006
2007
144
155
257
$ 3.43 $ 1.05
$ 3.69 $ 1.71
$ 6.12 $ 2.02
Repeat Purchases
Buy in '07
No
No
Yes
Yes
44
72
85
52%
13%
25%
10%
32
Gujarat Results

Video Treatment
◦ Framing main effects statistically
indistinguishable from zero, but bounds nontrivial
◦ Test of joint framing main effects cannot
reject no effects
◦ (Much larger sample than laboratory
experiments)

Discount has a large effect:
◦ Rs. 30 discount leads to ~13 percentage
point increase in take-up (off a base of 26%)
Gujarat Results:Video interactions

Treatment interactions:
◦ SEWA brand negative
 Discount even more important w/SEWA brand
 But maximum discount doesn’t overcome negative
effect
 Currently measuring trust in SEWA
◦ No direct effect of peer endorsement
 But peer endorsement more than halves demand
elasticity
Gujarat Results
 Take-Up Rate and Returns to Insurance
Ahmedabad
"Return" Take-Up
Discount
5
15
30
0.64
0.87
1.81
25%
37%
47%
Patan
"Return" Take-Up
0.54
0.61
0.78
0.22
0.22
0.30
Anand
"Return" Take-Up
n/a
n/a
n/a
0.36
0.37
0.44
• Calculate expected return of policy using historical data
• Purchase increasing in “return” / decreasing in price
• 53% of households decline policy with expected 81%
return over four months
35
Results on Investment Behavior

Andhra Pradesh
◦ Farmers self-report: no change in behavior

Gujarat
◦ Strong first stage (t-stat of 14)
◦ No effects on HYV adoption, investment decision

Unit demand puzzle
◦ 90 percent of households purchase only one unit
of insurance.
 Max payout per policy is roughly Rs 1,000
 Average total income is Rs 60,000
Summary
Factor
Andhra Pradesh
Reputation of Seller
Price (20% discount)
Liquidity (50% of premium)
Education
Salience (House Visit)
Subtle Psychological Cues

Models finding support:
◦ Rational
◦ Credit constraints
◦ Trust
Yes
-Yes
No
Yes
--
Gujarat
-Yes
--Yes (non-exp)
Some
Conclusions

Insurance demand is sensitive to price

Liquidity constraints are an important
barrier to household risk management

Non-standard factors such as trust are
important

Behavioral cues may affect demand elasticity

Unit demand unresolved puzzle
Future Directions of Study
Crop-specific insurance policies (cotton,
rice)
 Incorporate rainfall variation over
monsoon
 Have policies written at a taluka/tehsillevel
 Use agri-loans as a distribution channel

39
Appendix















Motivation – technical
Product Description
Graphic for sampling in AP
Religion cue
Summary stats on SC/ST, Religion
Speculation
Repeat buyers – AP
Gujarat video / flyer interactions
Gujarat video effects
Gujarat results – video interactions
AP marketing results
AP interactions
Gujarat flyer results
AP : Patterns of take-up
Gujarat : difference between Group vs. Individual framing
40
Motivation

Theory suggests households should not hold
idiosyncratic risk

Yet, most individuals (and countries) hold idiosyncratic
risk:
◦
◦
◦
◦
◦

Housing price risk
Local weather
Commodity prices
Regional income fluctuations
Disability
In some cases, financial contracts simply do not exist,
while in other cases, their use is not widespread.
Shiller (1998):
It is odd that there appear to have been no practical
proposals for establishing a set of markets to hedge the
biggest risks to standards of living
Product Description
• Total payout = sum of payouts across
three phases.
• Insurance premium based on actuarial
value + 25% admin fee + tax.
payout
2nd trigger
(corresponds to crop failure)
1st trigger
Sampling in AP
Radius of circle = 20km
Religion cue

Farmers used to worry about whether the
rains would come. After all, only God can
control the rain. But weather insurance
provides protection and security.

Ramjibhai used to worry about whether the
rains would come. After all, only God can
control the rain. But weather insurance
provides protection and security.

Hamikhan used to worry about whether the
rains would come. After all, only God can
control the rain. But weather insurance
provides protection and security.
44
Summary Statistics
Demographics
AP
Gujarat
Household Size
Scheduled Caste
Scheduled Tribe
Muslim
6.26
10%
2%
4%
5.94
35%
8%
9%

AP households less likely to be minority
Speculation

Index-based insurance may indeed
develop into a mature product
◦ Temperature, wind
◦ Satellite imagery (pilot in India this year)

Government of India subsidies hurting
private market
◦ But public subsidies may be necessary for
adoption
46
Patterns of Take-up (AP)
2004
No
No
No
Yes
No
Yes
Yes
Yes
2005
No
No
Yes
No
Yes
No
Yes
Yes
2006
No
Yes
No
No
Yes
Yes
No
Yes
Pct of Sample
50.14
15.57
1.05
12.7
0.48
6.21
2.67
2.1
Gujarat Design
Surveyed Households:Video
(2/10 | 8/10 ) * (Vulnerability | Security) * (SEWA
Brand) * (Rs. 5 | 15 | 30)
Non Surveyed Households:Video
(2/10 | 8/10 ) * (SEWA Brand | not) * (Peer |
teacher) * (Rs. 5 | 15 | 20) * (Security)
Flyer Manipulations
(Individual | Group )* (Muslim | Hindu | Neutral)
48
Gujarat Results: Video Effects
All
Panel A: Main Effects
"Vulnerability" Frame
0.05
(0.05)
-0.03
(0.02)
0.307 ***
(0.076)
-0.03
(0.03)
-0.03
(0.03)
0.16 **
(0.06)
Pays 2/10 Years
Discount Percent
Sewa Brand Strong
Peer Endorser
Surveyed Household
Sample
Village FE
0.04
(0.05)
-0.03
(0.02)
0.339 ***
(0.075)
-0.03
(0.03)
-0.02
(0.03)
0.18 ***
(0.06)
1413
No
1413
Yes
Gujarat Results:Video interactions
All
Panel B: Main Effects and Interactions
"Vulnerability" Frame
Pays 2/10 Years
Discount Percent
Sewa Brand Strong
Peer Endorser
Surveyed Household
Discount * "Vulnerability Frame"
Discount * Pays 2/10 Years
Discount * Sewa Brand Strong
Discount * Peer Endorser
Discount * Surveyed Household
0.13
(0.10)
-0.04
(0.04)
0.37
(0.15)
-0.08
(0.04)
0.02
(0.04)
0.21
(0.07)
-0.43
(0.33)
0.05
(0.13)
0.26
(0.12)
-0.25
(0.15)
-0.23
(0.31)
1413
**
**
***
**
*
0.13
(0.10)
-0.05
(0.04)
0.40
(0.15)
-0.08
(0.04)
0.04
(0.05)
0.21
(0.07)
-0.47
(0.34)
0.07
(0.13)
0.23
(0.13)
-0.27
(0.14)
-0.15
(0.31)
1413
***
**
***
*
*
50
AP Results
Treatment
Visit (1=Yes)
Endorsed by LSA (1=Yes)
Education module (1=Yes)
High reward (1=Yes)
Village was endorsed (1=Yes) x Visit (1=Yes)
HH Controls
Village dummies
Mean Dependent Variable
Observations
0.162
(0.043)***
0.064
(0.036)*
-0.021
(0.030)
0.342
(0.030)***
0.014
(0.046)
0.132
(0.050)***
0.065
(0.036)*
-0.023
(0.030)
0.338
(0.031)***
0.062
(0.059)
0.123
(0.051)**
0.063
(0.037)*
-0.025
(0.030)
0.326
(0.031)***
0.074
(0.060)
No
No
0.268
952
No
Yes
0.268
952
Yes
Yes
0.269
939
AP Results

Interactions with variables that may
influence:
◦ Endorsement
 Does not Know BASIX
◦ High reward
 Log PCE
 Log Wealth
Treatment Interactions
VAR x Endorsed by LSA (1=Yes)
VAR x Education Module (1=Yes)
VAR x High reward (1=Yes)
DK Basix
Log Wealth Log PCE
-0.183
(0.071)***
0.048
(0.063)
0.01
(0.067)
0.031
(0.027)
0.016
(0.025)
-0.028
(0.026)
0.038
(0.063)
0.038
(0.058)
-0.114
(0.059)*
Gujarat Results: Flyer Effects
Muslim Treatment
Hindu Treatment
Group Treatment
0.00
(0.02)
0.00
(0.02)
0.02
(0.02)
0.00
(0.02)
0.01
(0.02)
0.01
(0.02)
0.00
(0.02)
0.00
(0.02)
0.02
(0.02)
0.00
(0.02)
0.01
(0.02)
0.01
(0.02)
2391
No
2391
Yes
2391
No
2391
Yes
Muslim * Group
Hindu * Group
N
Village FE
• No detectable effect
• Sizeable confidence intervals (4 percentage points)
Gujarat Results: Flyer Effects
Muslim Treatment
Hindu Treatment
Group Treatment
Muslim * Group
Hindu * Group
N
Village FE

0.04
(0.03)
0.01
(0.03)
0.06 *
(0.03)
-0.09 **
(0.04)
-0.03
(0.05)
2391
No
0.04
(0.03)
0.02
(0.03)
0.06 **
(0.03)
-0.10 **
(0.04)
-0.04
(0.05)
2391
Yes
Some evidence “Group” and neutral effective…
◦ Muslim offsets
90% of sample is Hindu
 Coding names to check for same-religion effect

54
Patterns of Take-up (AP)
All Villages
N. Villages
where
insurance
sold
2003
2
2004
24
2005
12
2006
37

Study Area
Villages where insurance sold
in 2004
Share of HHs N. Villages
Share of HHs
Purchasing
where
Purchasing
insurance
insurance sold insurance
0.15
0.04
0.05
0.03
-24
11
24
-0.04
0.06
0.03
Entire State
N. Villages
where
insurance sold
17
43
422
538
Rainfall insurance is still in its infancy and has yet to
receive widespread acceptance.
Average
number of
buyers per
village
11.4
7.4
6.6
7.6
Group vs. Individual

This new insurance product
helps people like you and
helps you help your
neighbors and relatives in
case of draught. It is for
people whose livelihoods
depend on rain.

This new insurance product
helps people like you in case
of drought. It is for people
whose livelihoods depend on
rain.
56