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Dynamics of informal risk sharing in collective index insurance

Author

Listed:
  • Fernando P. Santos

    (Princeton University
    Princeton University)

  • Jorge M. Pacheco

    (Universidade do Minho
    ATP-Group, IST-Taguspark)

  • Francisco C. Santos

    (ATP-Group, IST-Taguspark
    Universidade de Lisboa, IST-Taguspark)

  • Simon A. Levin

    (Princeton University
    Princeton University
    Resources for the Future
    Beijer Institute of Ecological Economics)

Abstract

Extreme weather events often prevent low-income farmers from accessing high-return technologies that would enhance their productivity. As a result, they often fall into poverty traps, a problem likely to worsen as the frequency of weather disasters increases due to climate change. Insurance offers, in principle, a solution for this conundrum and a means to guarantee households’ wellbeing. Group collective index insurance constitutes an alternative to indemnity or individual index insurance, and has the potential to alleviate basis risk through within-group informal transfers. Here we show that collective index insurance introduces a coordination dilemma of insurance adoption: socially optimal outcomes are obtained when everyone adopts insurance; however, a minimum fraction of contributors is necessary before the effects of basis risk can be averaged out and individuals start taking up insurance. We further show that additional mechanisms—such as local peer monitoring and defector exclusion—are necessary to stabilize informal transfers and collective index insurance adoption. Together, collective index insurance and informal transfers may thus constitute a practical instrument to improve sustainability in developing countries.

Suggested Citation

  • Fernando P. Santos & Jorge M. Pacheco & Francisco C. Santos & Simon A. Levin, 2021. "Dynamics of informal risk sharing in collective index insurance," Nature Sustainability, Nature, vol. 4(5), pages 426-432, May.
  • Handle: RePEc:nat:natsus:v:4:y:2021:i:5:d:10.1038_s41893-020-00667-2
    DOI: 10.1038/s41893-020-00667-2
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    Cited by:

    1. Shi, Zhenyu & Wei, Wei & Perc, Matjaž & Li, Baifeng & Zheng, Zhiming, 2022. "Coupling group selection and network reciprocity in social dilemmas through multilayer networks," Applied Mathematics and Computation, Elsevier, vol. 418(C).
    2. You-Shyang Chen & Chien-Ku Lin & Yu-Sheng Lin & Su-Fen Chen & Huei-Hua Tsao, 2022. "Identification of Potential Valid Clients for a Sustainable Insurance Policy Using an Advanced Mixed Classification Model," Sustainability, MDPI, vol. 14(7), pages 1-22, March.
    3. Andrew R. Tilman & Elisabeth H. Krueger & Lisa C. McManus & James R. Watson, 2023. "Maintaining human wellbeing as socio-environmental systems undergo regime shifts," Papers 2309.04578, arXiv.org.

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