Behavioral economic insights on index insurance design

Abstract

Purpose -While behavioral economic experiments have uncovered a wealth of insights concerning how people decide in the face of risk and uncertainty, the implications of these insights for the demand for agricultural insurance are under-explored. The purpose of this paper is to report on results from two recent field experiments that measure the extent to which farmer behavior departs from the predictions of expected utility theory and derives the implications of these departures for insurance demand. Design/methodology/approach -Framed behavioral field experiments were played with random samples of West African Cotton farmers who lived in areas that were being incorporated into a cotton insurance pilot program. Findings -Substantial numbers of farmers depart from expected utility behavior in ways that predict excess sensitivity to uncovered basis risk in insurance contracts; and, the fact that insurance premiums are typically framed as certain and unavoidable, while benefits are unknown and stochastic. Originality/value -Using novel field experimental methods, the work summarized here indicates that more careful design of index insurance contracts in conformity with the findings of behavioral economics could result in larger contract uptake and, ultimately, larger development impacts.

Depressed demand for crop insurance contracts, and a rationale based on third generation Prospect Theory

“…Perhaps more emphasis should be placed on understanding and managing framing, including what happens before the insurance choice is made (Thaler, 2015)? Johnson et al (1993), Carter et al (2015) and Serfilippi et al (2019) have made interesting observations regarding implications of how the insurance choice is presented to the grower. Many other questions remain, including what available information is carried to the decision point and how such information is processed.…”

Insurance uptake among small and medium-sized tourism and hospitality enterprises in a resource-scarce environment

“…Several other risk coping measures, self-insurance and informal group-based mechanisms, which could either serve as surrogates or complementarities of insurance have been identified in the literature as barriers to micro-insurance demand (Churchill, 2006;Platteau et al, 2017). These are remittances from friends and relatives, precautionary savings, credit and informal risk sharing agreements (Carter, Elabed, & Serfilippi, 2015). On the tenets of the crowding-out and crowding-in hypotheses, these strategies could crowd-out insurance.…”

Index-Based Insurance of Gross Margin in Agriculture – Key Challenges

“…This is important in the context of behavioural aspects included in the decision-making process on the use of index-based insurance. The studies by Carter, Elabed and Serfilippi (2015) indicate that farmers are characterised by a high level of sensitivity to the basic risk and perceive the costs of contributions as certain and inevitable, while they assess payment of compensation rather as a stochastic event. Recently, the issue of reduced rationality as a factor determining the possibility of using index-based insurance was also pointed out by Mußhoff, Hirschauer, Grüner and Pielsticker (2018).…”