EMERGING
INSIGHTS
Managing Risk to Support Smallholder Farmers in South Asia and Sub-Saharan Africa:
Evidence from the Agricultural Technology Adoption Initiative
Agricultural Technology Adoption Initiative:
The Agricultural Technology Adoption Initiative (ATAI) has funded more than forty rigorous evaluations,
the majority full-scale randomized controlled trials, addressing critical evidence gaps with robust, causal
evidence. ATAI studies seek to advance practical understanding of the obstacles and opportunities critical
to technology adoption for smallholders. The “Emerging Insights” series distills evidence from ATAI and
complementary studies to broadly share the outcomes of the project as a means to inform programs and
policy. The following brief focuses on mitigating agricultural risks.
Context:
Evidence-based insights:
The systemic risks of agricultural production
play an important role in farmers’
agricultural investment decisions. W eather,
natural disasters, pests, and disease can
jeopardize farmers’ ability to recoup their
investments at harvest, and such risks can
depress productive input use. Therefore riskmitigating strategies for smallholders, such
as insurance and stress-tolerant inputs, can
impact yields and farmer welfare.
Limits to demand for standalone weather index insurance:
•
Lack of commercial viability at market prices and lack
of trust in insurance schemes limits take-up. Index
insurance products struggle to launch w ithout heavy
initial subsidies, and results are consistent w ith
substantial lack of trust for index insurers (Cole et al.
2013) (M obarak & Rosenzweig 2012) (Cole et al. 2014).
Few products have succeeded in sustaining demand in
the developing world with prices set at market rates
(above actuarially fair prices); full market price typically
yields an uptake of around 16%, and even a 50%
subsidy only increases demand to 38% (Mobarak &
Rosenzw eig 2012) (Karlan et al. 2012). As a result, these
products do not appear to be commercially viable as
standalone products
•
Linking credit with insurance has mixed results, suffering
from the same demand problems that have beset
standalone index insurance. The offering of
indemnified loans that interlink an insurance product
w ith credit appears promising, but demand for such
loans has been show n to be surprisingly low in the few
trials that have tested this mechanism (McIntosh et al.
2013) (Gine & Yang 2009) (Karlan et al. 2012) (Karlan et
al. 2010).
Are there strategies to address low demand for
insurance?
•
Demand for insurance increases when farmers observe
payouts over time. Receiving payouts in the previous
year has a strong effect on increasing subsequent
demand, increasing demand by almost 30% (Cai et al.
2010) (Cole et al. 2014) (Karlan et al. 2012). However,
not receiving payouts when a fair price has been paid
has a strong negative effect on subsequent demand.
Since the latter state is the ‘normal’ year for insurance
consumers, this bodes ill for adoption of insurance and
commercial viability.
•
Improving financial literacy and understanding of an
insurance product increases take-up. Financial literacy
can mitigate the demand-dampening effects of high
prices and low trust in index insurance (Cai et al. 2013)
(Gine et al. 2013). In a study from Gujarat, researchers
found that receiving an invitation to the financial
literacy training increased take-up by 5.3 percentage
points, but the cost of the training w as more than three
times the full cost of premiums (Guarav et al. 2011).
•
Adopting insurance can increase risk-taking in
production decisions. Where insurance projects have
been successful in achieving w idespread uptake
(largely via free distribution) they tend to increase the
appetite for activities vulnerable to rainfall risk (Cole et
al. 2013) (M obarak & Rosenzweig 2012) (Gunnsteinson
2014) (Cai et al. 2010) (Cai 2013), w hich has the
(somewhat counterintuitive) effect of increasing the
overall ex posure of agricultural activity to rainfall
volatility. Insured households are better financially
insulated (Janzen & Carter 2013), but uninsured
laborers may become more exposed as a result
(M obarak & Rosenzweig 2014).
•
New risk-mitigating crop varieties provide a promising
alternative to insurance that can reduce farmers’ risk
and produce higher yields. Similar to the impact of
insurance on farmer decision making, risk-mitigating
technologies such as submergence-tolerant rice allow
households to make riskier production decisions,
including input purchasing. In the event of climactic
shock, farmers using risk-mitigating technologies and
laborers on these plots are protected from great loss in
absolute yields (Dar et al. 2013), w hereas insured
farmers that made riskier planting decisions face crop
loss. Yield gains from risk-mitigating varieties can
disproportionately benefit marginalized groups that
cultivate less-desirable, risk-prone land
Risk: Future research
Particular Research Questions of Interest: Are there
effective strategies to address basis risk?
Basis risk is the risk that the official observation will not
accurately predict a farmer’s loss. The farmer ex periences
a poor harvest, but rainfall at the w eather station is
adequate, so there is no payout. M ore research is
needed to understand how basis risk can limit take-up of
index insurance (Carter et al. 2014).
•
•
Can groups insure against basis risk?
Since basis risk is largely covariate for a geographic
area, one promising approach appears to be the
provision of insurance to groups that are already
providing informal risk pooling of idiosyncratic risks
among their membership (Dercon et al. 2012).
Index insurance is a complement to informal
insurance only if the informal insurance has the
purpose of smoothing idiosyncratic risks.
Can improvements in index design resolve basis
risk?
Improved data could more closely align the
ex perienced conditions of smallholders’ plots with
the measured conditions at data collection facilities
(like rainfall at w eather station locations) used to set
the index (M obarak & Rosenzweig 2012)
Given the evidence-based insights above, and current
interest among related researchers and practitioners, ATAI
suggests research emphasizing the following topics to
further understand effective risk-reduction strategies for
smallholders.
Emphasized:
•
•
•
Risk-protective seeds and technology (e.g. irrigation
pumps, or other technologies reducing rain-fed
reliance): achieve the benefits of insurance to the
farmers w hile decreasing, not increasing, aggregate
ex posure of the agricultural system to w eather.
M eso-level insurance (financial institutions or
governments as clients): focus on the supply side and
provide insurance to institutions that are exposed to
w eather risk.
Use of free insurance as a form of social protection:
may be able to achieve a multiplier effect by
releasing farmers’ production decisions from risk
constraints.
De-Emphasized:
•
individual-level, market-priced index insurance
Evidence cited
C ai , H. , C hen, Y. , Fang H. , & Zho u L. A. (2010). Mi cro i nsurance, Trust and Eco no m i c
D ev el o pm ent : Ev i dence fro m a Rando m i z ed N at ural Fi el d Experi m ent . N at i o nal
Bureau o f Eco no m i c Research (N BER) W o rk i ng P aper 15396.
C ai , J. (2013). The Im pact o f Insurance P ro v i si o n o n Ho useho l ds' P ro duct i o n and
Fi nanci al D eci si o ns. W o rk i ng P aper. Muni ch P erso nal ReP Ec Archi v e (MP RA)
W o rk i ng P aper 46864.
C art er, M. R. , Laaj aj , R. , & Yang, D . (2013). The Im pact o f Vo ucher C o upo ns o n t he
Upt ak e o f Fert i l i z er and Im pro v ed Seeds: Ev i dence fro m a Rando m i z ed Tri al i n
Mo z am bi que. Am eri can Jo urnal o f Agri cul t ural Eco no m i cs, 95(5), 1345-1351.
C o l e, S. , Gi né, X. , et al . (2013). “ Barri ers t o ho useho l d ri sk m anagem ent : Ev i dence
fro m Indi a. ” Am eri can Eco no m i c Jo urnal : Appl i ed Eco no m i cs, 5(1), 104-135.
C o l e, S. , Gi né, X. , & Vi ck ery J. (2014). “ Ho w D o es Ri sk Managem ent Infl uence
P ro duct i o n D eci si o ns? Ev i dence fro m a Fi el d Experi m ent . ” Harv ard Busi ness
Scho o l (HBS) W o rk i ng P aper 13-080.
D ar, Manz o o r, Al ai n de Janv ry, K yl e Em eri ck , D av i d Rai t z er, and El i sabet h Sado ul et .
2013. “ Fl o o d-t o l erant ri ce reduces yi el d v ari abi l i t y and rai ses expect ed yi el d,
di fferent i al l y benefi t t i ng so ci al l y di sadv ant aged gro ups. ” Sci ent i fi c Repo rt s 3,
Art i cl e num ber 3315
D erco n, S. , Hi l l R. , C l ark e D . , Out es-Leo n I. , & Taffesse A. (2012). “ Offeri ng rai nfal l
i nsurance t o i nfo rm al i nsurance gro ups: ev i dence fro m a fi el d experi m ent i n
Et hi o pi a. ” Jo urnal o f D ev el o pm ent Eco no m i cs, 106, 132-143.
Gi né, X. & Yang D . (2009). Insurance, credi t , and t echno l o gy ado pt i o n: Fi el d
experi m ent al ev i dence fro m Mal aw i . Jo urnal o f D ev el o pm ent Eco no m i cs,
89(1), 1-11.
Gaurav , S. , C o l e, S. , & To bacm an, J. (2011). Mark et i ng C o m pl ex Fi nanci al P ro duct s
i n Em ergi ng Mark et s: Ev i dence fro m Rai nfal l Insurance i n Indi a. Jo urnal o f
Mark et i ng Research, Vo l . 48(N o . SP L), S150-S162.
Gunnst ei nso n, S. (2014). Ident i fyi ng Info rm at i o n Asym m et ri es i n Insurance: Theo ry
and Ev i dence o n C ro p Insurance i n t he P hi l i ppi nes. W o rk i ng P aper.
Janz en, S. & C art er, M. R. (2013). Aft er t he D ro ught : The Im pact o f Mi cro i nsurance
o n C o nsum pt i o n Sm o o t hi ng and Asset P ro t ect i o n. N at i o nal Bureau o f Eco no m i c
Research (N BER) W o rk i ng P aper 19702.
K arl an, D . , K ut so at i , E. , McMi l l an, M. , & Udry, C . (2010). C ro p pri ce i ndem ni fi ed l o ans
fo r farm ers: A pi l o t experi m ent i n rural Ghana. Jo urnal o f Ri sk and Uncert ai nt y,
78(1), 37-55.
[ ATAI] K arl an, D . , Osei , R. D . , Osei -Ak o t o , I. , & Udry, C . (2012). Agri cul t ural deci si o ns
aft er rel axi ng credi t and ri sk co nst rai nt s. The Quart erl y Jo urnal o f Eco no m i cs,
129 (2): 597– 652.
[ ATAI] McInt o sh, C . , Sarri s A. , & P apado po ul o s, F. (2013). P ro duct i v i t y, credi t , ri sk ,
and t he dem and fo r w eat her i ndex i nsurance i n sm al l ho l der agri cul t ure i n
Et hi o pi a. Agri cul t ural Eco no m i cs, 44(4-5), 399-417.
Mo barak , A. M. & Ro senz w ei g, M. (2012). Sel l i ng fo rm al i nsurance t o t he i nfo rm al l y
i nsured. Yal e Uni v ersi t y Eco no m i c Gro w t h C ent er D i scussi o n P aper.
Mo barak , A. M. & Ro senz w ei g, M. (2014). Ri sk , Insurance and W ages i n General
Equi l i bri um . N at i o nal Bureau o f Eco no m i c Research (N BER) W o rk i ng P aper
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The Center for Effective Global Action and The Abdul Latif Jameel Poverty Action Lab