MR Microinsurance_2012_03_29.indd - International Labour ...

256 General insurance
Th is factor, along with the fact that premiums are marked up by 20 per cent
means that even with insurance, the family’s consumption can still fall below its
pre-insurance average of 100 per cent. Household average income is also reduced
by 1 or 2 per cent because of the loadings charged to the insurance. Th e partial
reduction in the probability of low outcomes is purchased at the cost of reduced
average income.
Index insurance and high-return economic activities
Figure 11.5 illustrates the cumulative distribution function for the stylized highreturn
activity described in section 11.3 above. Compared to the traditional activity
(shown here as the dark green line), the high-return activity has mean returns
that are 25 per cent higher than the traditional agricultural activity and requires
the purchase of signifi cant cash inputs. Th e light grey line in Figure 11.5 shows
the probability of diff erent household consumption outcomes under the highreturn
activity when the cash costs are either completely self-fi nanced by the
household, or, equivalently, fi nanced by a fully secured loan.
As can be seen, under the high technology the household faces almost a 10
per cent chance that its total consumption will be less than 50 per cent of the
average income it can obtain under the low technology. However, some 40 per
cent of the time household consumption will be at least 25 per cent higher than
average income under the low technology.
Figure 11.5 Interlinking insurance and credit for technology take-up
Cumulative probability (%)
100
80
60
40
20
Low technology
Insured high technology,
high covariant risk
Insured high technology
High technology, no
insurance
0 0 50 100 150 Household consumption
(% of low technology average)
Th e dark grey line in Figure 11.5 shows the impact of index insurance when
interlinked with credit and technology take-up in a relatively unfavourable agro-