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Underwriting area-based yield insurance to crowd-in credit supply and demand

  • Carter, Michael R.
  • Galarza, Francisco
  • Boucher, Stephen

Recent theoretical and empirical evidence suggests that risk (especially covariant risk that is correlated across producers) may discourage both the supply of agricultural credit and the willingness of small holders to utilize available credit and enjoy the higher expected incomes credit could make available to them. One possible resolution to this problem is to remove risk from the system by independently insuring it. However, conventional (all hazard) crop insurance has in almost every instance been rendered financially unsustainable by moral hazard and adverse selection problems. This paper instead analyzes two index-based insurance schemes, one based on a weather index, and a second based on measured average yields. While these index insurance products do not protect the farmer from all risks, our econometric analysis (which is based on data from the north coast of Peru) shows that they could have substantial value to the producer and could also crowd-in credit supply from lenders reluctant to carry too much covariant risk in their loan portfolios. We also show that insurance based on measured yields is markedly superior to a weather index (for both borrowers and lenders). We close by arguing that present and past public good failures justify public intervention in this area, and analyze the feasibility of a public scheme to initially underwrite the costs and uncertainties associated with area-based yield insurance.

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File URL: http://mpra.ub.uni-muenchen.de/24326/1/MPRA_paper_24326.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24326.

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Date of creation: Nov 2007
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Publication status: Published in Savings and Development 3.31(2007): pp. 335-362
Handle: RePEc:pra:mprapa:24326
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Web page: http://mpra.ub.uni-muenchen.de

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  1. Nancy McCarthy, 2003. "Demand for rainfall-index based insurance: a case study from Morocco," EPTD discussion papers 106, International Food Policy Research Institute (IFPRI).
  2. Tullio Jappelli & Marco Pagano, 2000. "Information Sharing in Credit Markets: A Survey," CSEF Working Papers 36, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Harold Alderman & Trina Haque, 2007. "Insurance Against Covariate Shocks : The Role of Index-Based Insurance in Social Protection in Low-Income Countries of Africa," World Bank Publications, The World Bank, number 6736, September.
  4. Skees, Jerry & Varangis, Panos & Larson, Donald & Siegel, Paul, 2002. "Can financial markets be tapped to help poor people cope with weather risks ?," Policy Research Working Paper Series 2812, The World Bank.
  5. Skees, Jerry & Gober, Stephanie & Varangis, Panos & Lester, Rodney & Kalavakonda, Vijay, 2001. "Developing rainfall-based index insurance in Morocco," Policy Research Working Paper Series 2577, The World Bank.
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