MR Microinsurance_2012_03_29.indd - International Labour ...

72 Emerging issues
Box 3.3 Insurance, credit and technology adoption in Malawi
In their study Insurance, credit and technology adoption: Field experimental
evidence from Malawi, Gine and Yang (2007) evaluated a scheme, which was
created specifi cally for the study and discontinued afterwards, that bundled
weather index-based coverage with loans to purchase higher-yielding maize and
groundnut hybrid seeds. Th e policy paid a proportion (or the totality) of the
loan’s principal and interest, depending upon the rainfall in each of the growing
season’s three phases (planting, fl owering and harvest). It was priced at actuarially
fair rates based on historical local meteorological information and underwritten
by the Insurance Association of Malawi.
Th e main evaluation question was: Does the provision of microinsurance
against a major source of production risk (rainfall) encourage farmers to borrow
to adopt riskier but potentially more profi table crop technologies? Half of the
study subjects were randomly selected to be off ered credit for purchasing higher-
yielding maize and groundnut hybrid seeds. Th e remaining half were off ered the
same credit package, but bundled with weather index-based insurance that par-
tially or fully forgave the loan in the event of poor rainfall. Th e sample consisted
of 787 maize and groundnut farmers in 32 localities in central Malawi.
Surprisingly, the take-up of uninsured loans was 13 percentage points higher.
Th e researchers off ered a number of potential explanations for this observation,
including the limited liability inherent in stand-alone loan contracts, farmers’
lack of familiarity with growing hybrid seeds, perceptions of diff erent default
costs across the two credit packages and basis risk. In contravention of insurance
theory, microinsurance purchasing was additionally negatively associated with
farmers’ self-reported risk-aversion and positively with their levels of education,
income and wealth.
Source: Adapted from Gine and Yang, 2007.
Income and consumption
Gine et al. (2009) shed light on the unexpected fi nding from Malawi with their
examination of participation rates in a weather-based index insurance policy in
Andhra Pradesh, India. Contrary to theoretical predictions, risk-aversion signifi -
cantly decreased smallholders’ demand for microinsurance – a fi nding the authors
attributed to “household uncertainty about the product” coupled with resource
constraints typically faced by low-income families. If accurate, this observation
suggests that the eff ects of microinsurance regarding asset accumulation and
resource allocation might take longer to materialize, whereas more risk-seeking, or
possibly wealthier, households initially experiment with microinsurance products