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Is There Too Much Hype about Index-based Agricultural Insurance?

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  • Hans P. Binswanger-Mkhize

Abstract

Individual crop insurance has been largely abandoned in developing countries and replaced by insurance pilots based on weather indices. These pilot schemes have encountered low demand. Research suggests that better-off farmers may already be insured via income diversification, their assets and social networks, and may achieve profit-maximising portfolios without formal insurance contracts. They would be interested in such contracts only if they reliably reduced their exposure to risk at lower costs than their self-insurance mechanisms. Conversely, poor farmers are not able to self-insure adequately, have to trade-off returns for reduced risk and could, therefore, benefit from a well-designed insurance. But they are cash/credit constrained and, therefore, cannot advance the money before sowing time to buy insurance that pays out only after the harvest. Index insurance, therefore, cannot be scaled up. Even if a few farmers purchase it, governments still will need to run relief programmes for the uninsured. Standard ways suggested to improve the index insurance, such as reducing basis risks, educating farmers and improving weather data, do not improve the ability of small farmers to purchase insurance and may not improve product design sufficiently to be competitive with self-insurance of the better-off farmers.

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File URL: http://hdl.handle.net/10.1080/00220388.2011.625411
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Journal of Development Studies.

Volume (Year): 48 (2012)
Issue (Month): 2 (February)
Pages: 187-200

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Handle: RePEc:taf:jdevst:v:48:y:2012:i:2:p:187-200

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References

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  1. Rosenzweig, Mark R. & Binswanger, Hans P., 1989. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Bulletins 7455, University of Minnesota, Economic Development Center.
  2. Daniel J. Clarke, 2011. "A Theory of Rational Demand for Index Insurance," Economics Series Working Papers 572, University of Oxford, Department of Economics.
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Cited by:
  1. Collier, Benjamin & Skees, Jerry R. & Miranda, Mario J., 2012. "On the Efficient Management of Natural Disaster Risk Using Credit and Index Insurance," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124663, Agricultural and Applied Economics Association.
  2. Kurosaki, Takashi & Khan, Hidayat Ullah, 2013. "Household Vulnerability to Wild Animal Attacks in Developing Countries: Experimental Evidence from Rural Pakistan," PRIMCED Discussion Paper Series 37, Institute of Economic Research, Hitotsubashi University.
  3. Hertel, Thomas W., 2013. "Land, environment and climate: Contributing to the global public good," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  4. Kurosaki, Takashi & Khan, Hidayat Ullah, 2013. "Household Vulnerability to Wild Animal Attacks in Developing Countries: Experimental Evidence from Rural Pakistan," CEI Working Paper Series 2012-11, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  5. Antoine Leblois & Philippe Quirion & Benjamin Sultan, 2014. "Price vs. weather shock hedging for cash crops: ex ante evaluation for cotton producers in Cameroon," Post-Print halshs-00967313, HAL.

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