Underdeveloped farm? This looks like a case for ... an insurance seller

Financial Inclusion

Underdeveloped farm? This looks like a case for ... an insurance seller

A new study shows that once farmers trust that index insurance will pay out as promised, they'll give up money to get it. Photo: <a href="http://www.flickr.com/photos/ciat/5366709673/in/photostream/">CIAT (Flickr)</a>
A new study shows that once farmers trust that index insurance will pay out as promised, they'll give up money to get it. Photo: CIAT (Flickr)

A new study of farmers in northern Ghana found that given a choice between quick cash or index insurance coverage, they'll often opt for protection from risk.

The reason: Once farmers become confident, through experience or by word of mouth, that insurance will help offset their losses from bad weather, they're willing or able to invest more money in their farms for long-term gain.

The salient constraint to farmer investment is uninsured risk: when provided with insurance against the primary catastrophic risk they face, farmers are able to find resources to increase expenditure on their farms.

Demand for insurance in subsequent years is strongly increasing in a farmer’s own receipt of insurance payouts, and with the receipt of payouts by others in the farmer’s social network.

The paper, with Yale's Dean Karlan as lead author, is available for $5 from the National Bureau of Economic Research.

Index insurance isn't simple to design—basing a payout on weather patterns rather than on actual lost productivity makes it hard to reward members who've made their farms disproportionately productive—but new, hybrid models such as Mercy Corps' MiCRO continue to push it forward.

And this study is the latest evidence that from a poor farmer's perspective, the decision to buy a little security for the right price is simple enough.

(Via Chris Blattman.)

Related: Tropical Storm Isaac triggers microinsurance payout for small business owners in Haiti

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