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Insuring against droughts: Evidence on agricultural intensification and index insurance demand from a randomized evaluation in rural Bangladesh

Author

Listed:
  • Hill, Ruth Vargas
  • Kumar, Neha
  • Magnan, Nicholas
  • Makhija, Simrin
  • de Nicola, Francesca
  • Spielman, David J.
  • Ward, Patrick S.
Abstract
It is widely acknowledged that unmitigated risks provide a disincentive for otherwise optimal investments in modern farm inputs. Index insurance provides a means for managing risk without the burdens of asymmetric information and high transaction costs that plague traditional indemnity-based crop insurance programs. Yet many index insurance programs that have been piloted around the world have met with rather limited success, so the potential for insurance to foster more intensive agricultural production has yet to be realized. This study assesses both the demand for and the effectiveness of an innovative index insurance product designed to help smallholder farmers in Bangladesh manage risk to crop yields and the increased production costs associated with drought. Villages were randomized into either an insurance treatment or a comparison group, and discounts and rebates were randomly allocated across treatment villages to encourage insurance take-up and to allow for the estimation of the price elasticity of insurance demand. Among those offered insurance, we find insurance demand to be moderately price elastic, with discounts significantly more successful in stimulating demand than rebates. Farmers who are highly risk averse or sensitive to basis risk prefer a rebate to a discount, suggesting that the rebate may partially offset some of the implicit costs associated with insurance contract nonperformance. Having insurance yields both ex ante risk management effects and ex post income effects on agricultural input use. The risk management effects lead to increased expenditures on inputs during the aman rice-growing season, including expenditures for risky inputs such as fertilizers, as well as those for irrigation and pesticides. The income effects lead to increased seed expenditures during the boro rice-growing season, which may signal insured farmers’ higher rates of seed replacement, which broadens their access to technological improvements embodied in newer seeds as well as enhancing the genetic purity of cultivated seeds.

Suggested Citation

  • Hill, Ruth Vargas & Kumar, Neha & Magnan, Nicholas & Makhija, Simrin & de Nicola, Francesca & Spielman, David J. & Ward, Patrick S., 2017. "Insuring against droughts: Evidence on agricultural intensification and index insurance demand from a randomized evaluation in rural Bangladesh," IFPRI discussion papers 1630, International Food Policy Research Institute (IFPRI).
    • Handle: RePEc:fpr:ifprid:1630
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    References listed on IDEAS

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    Cited by:

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    2. Md Monjurul Islam & Tofael Ahamed & Ryozo Noguchi, 2018. "Land Suitability and Insurance Premiums: A GIS-based Multicriteria Analysis Approach for Sustainable Rice Production," Sustainability, MDPI, vol. 10(6), pages 1-28, May.
    3. Christophe Béné, 2020. "Resilience of local food systems and links to food security – A review of some important concepts in the context of COVID-19 and other shocks," Food Security: The Science, Sociology and Economics of Food Production and Access to Food, Springer;The International Society for Plant Pathology, vol. 12(4), pages 805-822, August.
    4. Hansen, James & Hellin, Jon & Rosenstock, Todd & Fisher, Eleanor & Cairns, Jill & Stirling, Clare & Lamanna, Christine & van Etten, Jacob & Rose, Alison & Campbell, Bruce, 2019. "Climate risk management and rural poverty reduction," Agricultural Systems, Elsevier, vol. 172(C), pages 28-46.
    5. Simtowe, Franklin & Amondo, Emily & Marenya, Paswel & Rahut, Dil & Sonder, Kai & Erenstein, Olaf, 2019. "Impacts of drought-tolerant maize varieties on productivity, risk, and resource use: Evidence from Uganda," Land Use Policy, Elsevier, vol. 88(C).
    6. Ayako Matsuda & Kazushi Takahashi & Munenobu Ikegami, 2019. "Direct and indirect impact of index-based livestock insurance in Southern Ethiopia," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(3), pages 481-502, July.
    7. Nathaniel Jensen & Munenobu Ikegami & Andrew Mude, 2017. "Integrating Social Protection Strategies for Improved Impact: A Comparative Evaluation of Cash Transfers and Index Insurance in Kenya," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 42(4), pages 675-707, October.

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    More about this item

    Keywords

    agriculture; investment; risk management; insurance; risk; weather hazards; drought; weather; climate; price elasticities; price formation; inputs; farm inputs; fertilizers; irrigation; pesticides; crops; yields; smallholders; index insurance; risk and uncertainty; O12 Microeconomic Analyses of Economic Development; O13 Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Product; Q12 Micro Analysis of Farm Firms; Farm Households; and Farm Input Markets; G22 Insurance; Insurance Companies; Actuarial Studies;
    All these keywords.

    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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