Category: Crop Insurance

Managing Basis Risk with Multiscale Index Insurance

That’s the title of my article with Ghada Elabed, Michael Carter, and Catherine Guirkinger, which was just published online in Agricultural Economics. Here is the abstract:

Agricultural index insurance indemnifies a farmer against losses based on an index that is correlated with, but not identical to, her or his individual outcomes. In practice, the level of correlation may be modest, exposing insured farmers to residual, basis risk. In this article, we study the impact of basis risk on the demand for index insurance under risk and compound risk aversion. We simulate the impact of basis risk on the demand for index insurance by Malian cotton farmers using data from field experiments that reveal the distributions of risk and compound risk aversion. The analysis shows that compound risk aversion depresses demand for a conventional index insurance contract some 13 percentage points below what would be predicted based on risk aversion alone. We then analyze an innovative multiscale index insurance contract that reduces basis risk relative to conventional, single-scale index insurance contract. Simulations indicate that demand for this multiscale contract would be some 40% higher than the demand for an equivalently priced conventional contract in the population of Malian cotton farmers. Finally, we report and discuss the actual uptake of a multiscale contract introduced in Mali.

The article discusses the index insurance contract my coauthors and I have developed for and sold to cotton producer cooperatives in southern Mali. The rest of this post is more technical, as it goes into the details of the two contributions I’ve highlighted above. Continue reading

Managing Basis Risk with Index Insurance in West Africa

Exposure to risk is one of life’s few certitudes. For people who live in developing countries, where underdevelopment almost always extends to financial markets, and where financial instruments to hedge against risk are fewer and further between than in industrialized countries, risk is even more prevalent. The rise of microfinance over the last 20 years has brought about the development of financial instruments designed to protect the poor against some of the risk they face. We first develop an innovative index insurance contract for West African cotton producers, whose harvests are highly variable. The main feature of this contract is that relative to commonly used index insurance contracts, it considerably reduces the basis risk faced by West African cotton producers. We then describe an ongoing evaluation of the impacts of the double-trigger insurance contract in Mali and Burkina Faso. Continue reading

The Third Pillar of Microfinance: Insurance for the Poor in Developing Countries

Over the last few years, index insurance has been receiving an increasing amount of attention from researchers and policy makers.

Whereas regular insurance pays out when a verifiable loss is incurred (e.g., flood insurance pays out when there has been a flood), whether an index insurance pays out depends on whether some index crosses a certain threshold. So for example, a rainfall index insurance for the agricultural producers in a given region would pay out when growing conditions in that region are too dry, i.e., when rainfall falls below a specific, predetermined threshold.

The beauty of index insurance is that it greatly reduces the scope for moral hazard. Indeed, if I insure your crop, you might well decide to neglect your field, do nothing for the entire season, and wait for me to give you a payout. Not so with index insurance, since the index (e.g., rainfall, temperature, etc.) is typically very difficult to manipulate. Continue reading

Postdoctoral Fellowship at UC Davis

I  received the following announcement from the Index Insurance Innovation Initiative, which is funding my work on index insurance for cotton producers in Mali:

The BASIS Assets and Market Access Collaborative Research Support Program at the University of California, Davis seeks to hire a post-doc in economics or agricultural economics to assist with the development and implementation of its research program on risk and insurance. BASIS and its sister Index Insurance Innovation Initiative (I4) currently have ten rural insurance pilot projects underway. There is burgeoning interest in determining whether and how index insurance instruments can be used to solve long-standing development problems associated with uninsured risk, and the newly refunded BASIS program anticipates funding additional research in this area using its core grant funds from the US Agency for International Development. In addition, we expect opportunities to develop further research in this area by working directly with USAID’s missions worldwide.

Working in collaboration with the BASIS director, Michael Carter, and USAID staff, the Post-Doc will engage in a program of outreach to USAID missions. We anticipate that the results of these visits will be further demands for technical analysis of possible index insurance solutions and research project design. The post-doc will have ample opportunity to participate and direct resulting research programs on this topic. In addition to these research activities, the post-doc will take responsibility for preparing a set of “how-to” briefs explaining index insurance issues and options for practitioners. The post-doc will interact and may collaborate with the full team of I4 researchers, which includes faculty members and researchers at a broad range of institutions, including Australian National University, the Universities of Athens, California-Berkeley, California-Davis, California-San Diego, Colorado, Cornell, Duke, Namur, Oxford, the Food and Agriculture Organization of the United Nations, the International Food Policy Research Institute, and the International Livestock Research Institute.

The position requires a PhD in economics and agricultural economics. Prior research on agricultural risk and insurance is highly desirable, as is experience with impact evaluation of complex programs. Excellent writing and communication skills are a must. Funding is available for up to five years, although it is anticipated that most individuals will want to hold the position for only a fraction of that time period. The position will require extended trips to various world regions several times per year. Interested individuals should send an application letter describing qualifications, a CV, a list of references and a research paper to ifour@ucdavis.edu. Questions may also be directed to that address. Applications must be received by 1 March to receive full consideration. The position will be available by 1 April 2012, although it is expected that most candidates will not be available to start the position until mid-year.

Super Committee: Cut US Farm Subsidies, Not Foreign Aid; Pass Go, Save $20 Billion

So says the Center for Global Development’s (CGD) Kimberly Ann Elliott in a recent post:

As a start, CGD colleague Connie Veillette and John Norris from the Center for American Progress identified five ways to “make aid more effective and save more than $2 billion.” Three of their five recommendations involve cuts in subsidies for farmers, shippers, and NGOs that would make US food aid policies more flexible, responsive, and development-friendly… and save a half billion dollars. In addition, Connie and John recommended cutting at least $1.5 billion from farm subsidies, which go disproportionately to larger, richer producers.

Increasingly in the congressional debate, the $5 billion in “direct payments” that go to farmers every year — regardless of crop prices or yields, and on top of any other subsidies they receive — have moved squarely into the budget-cutting bulls eye. Eliminating those payments, which were created almost two decades ago as part of a failed effort to reform farm subsidies, is certainly justified, but those payments are delinked from production and cutting them would do little to reduce the global distortions imposed on developing-country producers. There is also another $10-12 billion in trade-distorting subsidies that undermine incentives to invest in agriculture in developing countries – those should not escape the budget ax.

I have addressed this topic many times on this blog in order to make the exact same point Connie Veillette and John Norris make. In chronological order: Continue reading