Systematic Review. The effectiveness of index-based micro-insurance in helping smallholders manage weather-related risks
This review examined published and unpublished material relevant to take-up and impact of index-based micro-insurance
The lack of access to formal risk management mechanisms for the majority of the world’s smallholders means that households are forced to self-insure (i.e. draw down on savings or assets to meet consumption needs in the event of a catastrophe) against catastrophic events such as drought. Informal risk management methods, however, often diminish the productivity of agricultural activities, and provide only limited coverage.
Index-based micro-insurance overcomes many of the challenges faced by crop insurance programmes by delinking indemnification from individual production. Although subject to its own limitations, such as basis risk, index insurance may provide less-costly and more-transparent risk management than other alternative products, enabling farmers to make more-productive investments and better manage consumption risk.
Keeping in mind the limitations of generalizing from just 13 studies, our synthesis nonetheless identifies some notable patterns. In terms of take-up, higher liquidity and income levels available to the household were found to be positively associated with take-up. A lower level of income diversification appears positively associated with insurance demand.
Financial literacy is positively correlated with interest in weather insurance. Familiarity and trust in the external agent or organisation selling the insurance product as well as trust in the insurance product elicited by information from, or decisions by, personal networks are also associated with higher levels of take-up. Surprisingly, higher levels of risk aversion are associated with lower demand for index-based micro-insurance.
We also find mixed evidence of the impact of insurance cover on input usage. Farmers offered a bundled loan and insurance products were found to be less likely to accept the loan to finance hybrid seeds. In another study, insurance coverage is associated with greater purchases of fertiliser, where heterogeneous effects revealed that this effect was larger for smallholders who had used fertiliser in the past and portrayed better understanding of the insurance product. In addition, it was found that having to pay for the insurance product, rather than it being offered for free, increased the impact on fertiliser purchases.
The review shows that several non-price factors, including financial literacy, trust and liquidity, appear to affect demand for index-based micro-insurance products and that there is some, although mixed, evidence that access to index-based insurance increases the use of agricultural inputs, such as fertiliser.
In terms of research implications, the review has revealed substantial evidence gaps in the literature on take-up and impact of index-based micro-insurance. Little is known about issues such as the level and impact of basis risk, financial literacy, consumer education and the possibility of group-based index insurance. Future research needs to focus on these important areas to gain in order for a more complete understanding of the relevance of index-based insurance as a policy solution. The field is in urgent need of evaluations analysing take-up and, more importantly, impact of marketed index-based micro-insurance products.
There is a protocol for this systematic review
Cole, S.; Bastian, G.; Vyas, S.; Wendel, C.; Stein, D. Systematic Review. The effectiveness of index-based micro-insurance in helping smallholders manage weather-related risks. EPPI-Centre, Social Science Research Unit, Institute of Education, University of London, London, UK (2012) 73 pp. ISBN 978-1-907345-35-7