Palliative Insurance Demand Pattern
RCTReview
Weather index insurance is theorized to enable low-input farmers to adopt risky agricultural technologies, but in practice adoption is highest among farmers who already use high input levels. Insurance serves a protective function for existing input users rather than driving new technology adoption.
Picture this
Imagine a health insurance policy meant to encourage sedentary people to start extreme mountain climbing. The primary buyers end up being experienced climbers who scale mountains every weekend and want protection for financial risks already incurred.
What the evidence says
Marginal product of inputs negatively predicts actual insurance purchase in interlinked villages (coefficient = -0.0221, p < 0.01), sum insured (coefficient = -30.91, p < 0.01), and own cash spent (coefficient = -1.050, p < 0.01). Chemical fertilizer use positively predicts uptake (coefficient = +0.177, p < 0.05).
- Who was studied
- N = 440 rural smallholder households across sales-active Kebeles in Amhara, Ethiopia.
- How
- Instrumental variable production function estimation of factor marginal products linked to probit models of insurance purchase, sum insured, and own-cash outlay.
What to do
Target weather index insurance sales campaigns toward farmers with existing high input expenditures to safeguard current investments before expecting insurance to drive adoption among non-users.
From the source
"High fertilizer use (indicating a lower marginal product of cash inputs) is a strong determinant of insurance uptake, the sum insured, and the amount of own cash that farmers put into buying insurance. This suggests that the product is likely to provide protection primarily to those who were already using inputs at high levels, rather than enabling a 'transformative' increase in input use among those who had not previously used them."
Productivity, credit, risk, and the demand for weather index insurance in smallholder agriculture in Ethiopia