Payout Frequency vs. Risk Protection Preference Misalignment
RCTClinical Trial
Risk-averse smallholders paradoxically express higher willingness to pay for policy adjustments that increase frequent, small payouts during minor weather deficits rather than coverage protecting against low-probability, catastrophic tail events.
Picture this
It is like a homeowner paying a premium for an insurance policy that reimburses $20 every time minor hail touches the roof, while refusing to pay for coverage that reimburses the full value of the house when a tornado destroys it.
What the evidence says
Reducing frequent mm deficit payouts lowered willingness to pay by Rs. 11.90 (despite a modest expected value drop of Rs. 10–20), whereas raising the catastrophic exit threshold increased willingness to pay by only Rs. 10.86 (despite a massive expected value increase of Rs. 40–70).
- Who was studied
- N = 1,978 agricultural producers in rural Andhra Pradesh, India.
- How
- Becker-DeGroot-Marschak (BDM) willingness-to-pay elicitations comparing contract terms modifying frequent moderate payout rates (mm deficit) versus catastrophic payout triggers (exit threshold).
What to do
Standardize micro-insurance product designs through regulatory mandates to prevent market providers from over-indexing on high-frequency, low-value payouts that distort true catastrophic risk hedging.
From the source
"As a result, there may be a disconnect between what farmers want, i.e. policies with higher frequency payouts and what farmers may need given risk aversion, i.e. policies that pay relatively more in low-probability events."
How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment