Transcript Insurance for the Poor?

Insurance for the Poor?
Stefan Dercon
Oxford University
Beijing 2007
Risk is Very Costly for the Poor
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Poor live in high risk environment
With high welfare costs:
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Short-run: consumption/nutrition shortfalls
 E.g Ethiopia drought 2002? 16% lower
consumption
Long-run: persistent effects
 E.g. Ethiopia rural growth in 1990s lower for
those affected by 1984-85 famine
Making risk a cause of poverty persistence
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Loss of assets/health/human capital in crisis
Avoidance of high return activities to keep risk low
How to design better protection?
Taking into account:
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interventions
(micro)credit activities, especially using
groups
 safety nets
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Starting from people’s risk strategies
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mutual support (‘risk sharing’) via networks
and groups
The problem of insurance
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Problem with groups
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covariate or catastrophic risks
Problem with insurance provision
information problems (adverse selection
and moral hazard)
 Administration costs
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Problems with risk
Risk perception errors
 Uncertainty/Ambiguity
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1. Build on Existing Groups
Partnership of existing ‘groups’ (self-help
groups, cooperatives, funeral societies)
 To handle covariate/catastrophic shocks
 Avoids adverse selection
 Reduces costs including of monitoring
(‘delegated monitor model’)
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Avoids crowding out of informal support
networks
Given much ambiguity, mutual insurer model
(=make groups shareholders) superior to just
offering insurance to groups
2. Tailor products to problems
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Different risks have different
informational/verification problems
Health – adverse selection
 Crop failure – moral hazard/verification
 Death – no incentive problem (verification?)
 Property/fire – moral hazard
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Innovations
SEWA: life insurance
 Indexed Products for Rainfall
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3.“Insurance is always sold but never bought
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Designing product easy and hypothetical
demand is high
Insurance uptake is rarely swift or high
Ambiguity can help to explain
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Increases costs and reduces benefits
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Investing in data and in education about
insurance…
Rainfall insurance experiments: success but (s)low
uptake. Dangerous!
Advantage of dealing with groups.
4. Insurance crowds out credit
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Individual credit provision:
If enforcement is imperfect in credit
market,
 then making defaulting on loan less painful
would reduce credit provision (as incentives
to be careless are stronger)
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Group-based credit provision:
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Insurance would undermine incentives for
repayment by group
4. Implications of crowding out?
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Problem is especially there for ‘businessrelated’ risks (with moral hazard);
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There would be a case for monopoly power for
credit and insurance provision in poor settings
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Case for interlinked contracts within microfinance;
Crowding out of credit with safety nets?
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Indexed products would help (rainfall);
E.g. workfare programmes?
Exception: if repayment perfectly
enforceable, insurance would crowd in credit.
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E.g. Fertiliser in Ethiopia.
5. Is microcredit is overrated?
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Emphasis on microcredit and productive asset
creation by the poor for poverty reduction is
EXCESSIVE.
As if poverty reduction is best achieved via
enterpreneurial activities…
Evidence on welfare impact of credit: Karlan
and Zinman (2006).: substantial from impact
offering consumption credit
6. Joined-up thinking
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Microinsurance, savings, microcredit and
safety nets:
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all mechanisms to fix failures of credit and
insurance markets
in a context of many ‘informal’ risk strategies
already used
Allow people long-term planning beyond
resource constraints at particular periods of
time or ‘states of nature’
Most cost-effective solution from integrating
thinking around all of them, with trade-offs
and complementarities.