Adoption and impact of index-insurance and credit for smallholder farmers in developing countries

Abstract

Purpose – The purpose of this paper is to review the most recent scientific literature on the determinants explaining the demand for index-insurance, the impact of index-insurance and the existing links between insurance and credit. In this meta-analysis, the authors identify key discoveries on the potential of index-insurance in enhancing credit supply for smallholders and thus farm productivity. Design/methodology/approach – Following a systematic literature search in Scopus and Web of Science, relevant empirical articles were identified by using the following criteria search algorithm: “insurance” and (“weather” or “micro” or “area?based” or “rain*” or “livestock” or “index”), and ((“empiric*” or “experiment” or “trial” or “RCT” or “impact”) or (“credit” or “loan*” or “debt” or “finance”)). The authors identified 1,133 related papers, 110 of which were selected as closely matching the study criteria. After removing duplicates and analysing each document, 45 papers were included in the current analysis. The framework for addressing insurance and credit issues, in the paper, entails three subsequent themes, namely, adoption of insurance, impact of insurance and links between insurance and credit. Findings – It is not confirmed yet that demand for insurance is indeed hump-shaped in risk aversion and the functional form of this relationship should be tested in more detail. This also holds for the magnitude of the effect of trust and education on actual demand. Furthermore, it is unclear to what extent other risk mitigation strategies form complements or substitutes to index-insurance. Lastly, the interaction between basis risk and price is important to the design of index-insurance products. If basis risk and price elasticity are indeed highly correlated, products that diminish basis risk are crucial in increasing demand. On the impact of bundled products, e.g. combination of insurance and credit, limited empirical research has been conducted. For example, it is unknown to what extent credit suppliers would react to the insured status of farmers or what the preferences of farmers are when it comes to a mix of financial products. In addition, several researchers have suggested that microfinance institutions or banks could insure themselves against covariate risk, yet no empirical evidence about this insurance mechanism has been conducted so far. Research limitations/implications – The authors based the research on scientific literature uploaded in Scopus and Web of Science. Other potentially insightful grey literature was not included due to lack of accessibility. Given the research findings, there is plenty of opportunity for further research particularly with regard to the effects of bundled products, e.g. insurance plus credit, on demand for index-insurance, supply of credit, loan conditions and impact on farm productivity and farmers’ well-being. Practical implications – Microfinance institutions, insurance companies, NGOs, research institutions and universities, particularly in developing countries, will be interested to learn about the systematic review of scientific research done in the area of insurance and credit for agriculture and the possibilities for application in their own practice of supplying these financial products. Social implications – A rigorous understanding of the potential of index-insurance and credit is essential for identifying the right mix of financial products that help smallholder farmers to increase farm productivity and their own well-being. Originality/value – The paper is valuable due to its rigorous evaluation of existing theoretical and empirical research around issues explaining the degree of adoption and impact of index-insurance and that of bundled financial products (i.e. index-insurance plus credit). The paper has the potential to become essential reading for academics, practitioners and policy-makers interested in researching and putting in practice the best options leading to greater farm productivity and well-being in developing countries.

Impact of financial inclusion in low- and middle-income countries: a systematic review of reviews

“…Stewart et al (2012) attempted to include microinsurance in their review, but found the insurance services to be too recent to have an adequate evidence base. We found five meta-studies on insurance, including ones focused on on the effectiveness of index-based weather insurance Marr et al, 2016), and of micro health insurance (Bhageerati et al, 2017;Habib, Perveen, & Khuwaja, 2016;). However, all five were ranked low confidence during the assessment of methodological quality and risk of bias.…”

Addressing Fractional Dimensionality in the Application of Weather Index Insurance and Climate Risk Financing in Agricultural Development: A Dynamic Triggering Approach

“…In this way we make two advances to the literature and practice in the design of WII and the application to climate risk financing. On this latter point, insurance linked or bundled credit products have been promoted by a number of scholars including Skees and Barnett (2006), Gine and Yang (2009), Carter et al (2011), Karlan et al (2011), Miranda and Gonzales-Vega (2011), Collier et al (2011), Shee and Turvey (2012), Shee et al (2015), Marr et al (2016), Pelka et al (2015), Carter et al (2016), von Negenborn et al (2018 and Mishra et al (2018). Clarke and Grenham (2013) and Jensen et al (2016) point out that basis risk limits farmers' investment in weather index insurance.…”

IFAD Research Series 38 – Meta-Evidence Review on the Impacts of Investments in Agricultural and Rural Development on Sustainable Development Goals 1 and 2

“…Cole et al (2012) systematically reviewed the literature on agricultural index insurance but found no papers with evidence regarding the impacts on income, productivity, or food and nutrition security despite including these in the search. Marr et al (2016) systematically reviewed the literature on index insurance including takeup, impacts and interactions with credit products in developing countries. They identified only two papers, both with positive results, showing empirical evidence of the effect of index insurance on income/consumption, although they included papers that modelled both negative and positive effects on income.…”