Insurable Interest Exclusion and GE Welfare Spillover
RCTClinical Trial
Regulatory frameworks in developing nations restrict agricultural index insurance strictly to land-owning cultivators under "insurable interest" rules, barring landless wage workers from buying policy contracts [1, 10, 21]. Marketing weather insurance exclusively to landowners induces higher risk-taking that increases wage volatility, leaving landless laborers worse off than in an economy without any formal insurance products [1, 21, 22].
Picture this
Imagine a law that allows shop owners in a town to buy fire insurance, but forbids the shop employees from buying unemployment insurance. When shop owners buy fire insurance, they stock their shelves with fragile glass statues that yield huge profits when safe, but shatter instantly during fires. If a fire occurs, the shop owners collect insurance money, but all the workers get laid off with zero income. If the workers were also allowed to buy insurance, their payouts during fire events would support them and prevent the entire town's wage market from collapsing.
What the evidence says
Marketing insurance solely to cultivators (25.6% coverage) reduces drought wages by 0.63 log points at the 30th percentile of rainfall and 0.23 log points at median rainfall [27]. Jointly offering insurance to both cultivators (25.6%) and laborers (31.8%) eliminates wage volatility, raising median rainfall wages by 11.7% and 80th percentile wages by 19% [30].
- Who was studied
- 4,706 landless wage workers aged 20+ and 1,585 landowning households across 63 sample villages in India [4, 5, 23].
- How
- General equilibrium wage model estimation combined with counterfactual policy simulations across cultivator-only, laborer-only, and joint insurance coverage regimes [6, 24-30].
What to do
Repeal legal insurable interest mandates that restrict agricultural weather index insurance to land title holders, extending eligibility to landless agricultural wage laborers.
From the source
"Policy simulations based on our estimates suggest that selling insurance only to land-owning cultivators and precluding the landless from the insurance market (which is the current regulatory practice in India and other developing countries), makes wage laborers worse off relative to a situation where insurance does not exist at all." [1]
Risk, Insurance and Wages in General Equilibrium