Changes in credit uptake and on-farm risk management
due to group insurance
Presentation 2012 Research Conference on Microinsurance
Enschede, 12 April 2012
Morsink, Gebrehiwot, Geurts, Van der Veen
Institute of Governance Studies (IGS), University of Twente, The Netherlands
Group insurance and on-farm risk management
 Low agricultural investment: Uncertainty due to downside risk
and/or lack of capital due to credit constraints?
 A combination of agricultural insurance and credit?
 Design of agriculture insurance is problematic.
 Group insurance: What is the effect of group insurance (versus
other designs) on on-farm risk management (investment)?
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Analysing group insurance effect?
GROUP
INSURANCE
Insurance
effect
Average yield
effect
INVESTMENT IN
AGRICULTURE
Group
distribution
effect
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Theory: Indemnified insurance
 A farmer will invest versus not invest when:
ρU(y1 - p + yb + g(A)) + (1- ρ)U(y1 - p + yb ) > U(y1 + yb )
(8)
 The insurance has pay out T in case of bad weather and
investment. No pay out without investment. Premium is m.
 A farmer will invest with insurance versus not invest when:
ρU(y1 - m - p + yb + g(A)) + (1- ρ)U(y1 – m - p + yb + T) >
U(y1 + yb)
(10)
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Theory: Average area yield index
 Area yield index insurance: The insurance has a pay out of S in
case of bad weather (1- q) and the premium is n. For individual
farmer four conditions exist: ρq, ρ(1-q), (1-ρ)q, (1-ρ)(1-q)
 Farmers will now choose to invest with insurance versus not
invest (and no insurance)
ρqU(y1 – n – p + yb + g(A)) +
(13)
ρ(1-q)U(y1 – n - p + yb + g(A) + S) +
(1- ρ)qU(y1 – n + yb ) + (1- ρ)(1-q)U(y1 – n + yb + S) >
U(y1 + yb )
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Theory: If credit constrained
 Investment A can’t be more than y1  A = y1 / p. With insurance
the farmer can invest A = (y1 – m) / p or A = (y1 – n)/p.
 Farmers will now choose to invest with insurance and taking up
credit versus not invest (and no insurance)
ρqu (y1 – n – p + yb + g(A)-d) +
(17)
ρ(1-q)u(y1 – n - p + yb + g(A) + S-d) + (1- ρ)qu(y1 – n + yb-d) +
(1- ρ)(1-q)u(y1 – n + yb + S-d) > u (y1 + yb)
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Research design
 Framed field experiments, focus groups, questionnaires, and short
interviews.
 220 smallholder farmers in Tigray, Ethiopia
 Random assignment of insurance:
 Individual indemnity (T1)
 Average area-yield index (T2)
 in follow-up: group insurance (T3).
 Pretest and posttest on-farm risk management preferences,
controlling for past and current credit uptake and credit
contraints.
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Research design
Pretest on-farm
risk management game
Indemnity
insurance
Training
Indemnity
insurance
treatment
Average area yield
index insurance
Training
No treatment
Average area
yield index
insurance
treatmetn
No treatment
Posttest on-farm
risk management Game
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Change of relative investment in farming
Variables
Model 1
Individual
Insurance
Model 2
(Constant)
,070
-,062
,187
,121
Land size in Tsemdi
,000
,001
,006
,009
Credit unconstraint=1
,023
,041
-,046
-,053
Credit change
-,012
-,018
-,001
-,021
Risk preference
-,006
-,025
-,006
,001
Risk averse=1
,092
,151
-,091
-,121
,209
Insurance
Adjusted R Square
Area Yield
Insurance
Model 3 Model 4
-0,027
0,290
,095
0,008
0,062
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Preliminary conclusions and way forward
 Indemnity insurance seems to have significant and substantial
effect on investment. Area yield index is significant but not
substantial. Basis risk effect?
 Effect of insurance on change in take up of credit (47% already),
both positive and negative effect.
 Risk preferences: Role of faith in decisions under risk versus
probability  Aspirations?
 Group dynamics and household decisions under risk.
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Controls
 Risk preferences, gain and loss frames
 Time preferences
 Credit constraints
 Perception of own yield versus average group yield
 Farm characteristics
 Previous weather and yield experiences
 Other household expenditures and investments
 Social capital
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