Insurance for the Poor?

1. Insurance for the Poor? Stefan Dercon Oxford University Beijing 2007

2. Risk is Very Costly for the Poor • Poor live in high risk environment • With high welfare costs: • Short-run: consumption/nutrition shortfalls • E.g Ethiopia drought 2002? 16% lower consumption • Long-run: persistent effects • E.g. Ethiopia rural growth in 1990s lower for those affected by 1984-85 famine • Making risk a cause of poverty persistence • Loss of assets/health/human capital in crisis • Avoidance of high return activities to keep risk low

3. How to design better protection? Taking into account: • interventions • (micro)credit activities, especially using groups • safety nets • Starting from people’s risk strategies • mutual support (‘risk sharing’) via networks and groups

4. The problem of insurance • Problem with groups • covariate or catastrophic risks • Problem with insurance provision • information problems (adverse selection and moral hazard) • Administration costs • Problems with risk • Risk perception errors • Uncertainty/Ambiguity

5. 1. Build on Existing Groups Partnership of existing ‘groups’ (self-help groups, cooperatives, funeral societies) • To handle covariate/catastrophic shocks • Avoids adverse selection • Reduces costs including of monitoring (‘delegated monitor model’) • Avoids crowding out of informal support networks • Given much ambiguity, mutual insurer model (=make groups shareholders) superior to just offering insurance to groups

6. 2. Tailor products to problems • Different risks have different informational/verification problems • Health – adverse selection • Crop failure – moral hazard/verification • Death – no incentive problem (verification?) • Property/fire – moral hazard • Innovations • SEWA: life insurance • Indexed Products for Rainfall

7. 3.“Insurance is always sold but never bought” • Designing product easy and hypothetical demand is high • Insurance uptake is rarely swift or high • Ambiguity can help to explain • Investing in data and in education about insurance… • Increases costs and reduces benefits • Rainfall insurance experiments: success but (s)low uptake. Dangerous! • Advantage of dealing with groups.

8. 4. Insurance crowds out credit • Individual credit provision: • If enforcement is imperfect in credit market, • then making defaulting on loan less painful would reduce credit provision (as incentives to be careless are stronger) • Group-based credit provision: • Insurance would undermine incentives for repayment by group

9. 4. Implications of crowding out? • Problem is especially there for ‘business-related’ risks (with moral hazard); • Indexed products would help (rainfall); • There would be a case for monopoly power for credit and insurance provision in poor settings • Case for interlinked contracts within microfinance; • Crowding out of credit with safety nets? • E.g. workfare programmes? • Exception: if repayment perfectly enforceable, insurance would crowd in credit. • E.g. Fertiliser in Ethiopia.

10. 5. Is microcredit is overrated? • Emphasis on microcredit and productive asset creation by the poor for poverty reduction is EXCESSIVE. • As if poverty reduction is best achieved via enterpreneurial activities… • Evidence on welfare impact of credit: Karlan and Zinman (2006).: substantial from impact offering consumption credit

11. 6. Joined-up thinking • Microinsurance, savings, microcredit and safety nets: • all mechanisms to fix failures of credit and insurance markets • in a context of many ‘informal’ risk strategies already used • Allow people long-term planning beyond resource constraints at particular periods of time or ‘states of nature’ • Most cost-effective solution from integrating thinking around all of them, with trade-offs and complementarities.