Index-based insurance: Lottery ticket or insurance?
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Nathaniel Jensen, Christopher Barrett, Andrew Mude. (1/7/2015). Index-based insurance: Lottery ticket or insurance.
Abstract
Environmental shocks are drivers of poverty as well as a
fact of life in many rural areas of the developing world. In
the developed world, agricultural insurance provides some
protection from such calamities. But conventional insurance
products have not reached many rural households in
developing countries due to the high costs of gathering
information relative to the size of policies demanded and
well-known moral hazard, and adverse selection issues that
complicate product design and pricing.
Recently, there has been much excitement around
the use of index-based insurance, as an alternative to
conventional insurance products, to extend the rural
poor’s access to formal insurance coverage in developing
countries (Alderman & Haque 2007; Barnett, Barrett
& Skees 2008; Mahul & Stutley 2010). Index insurance
provides indemnity payments based on a signal that
2 ILRI Research Brief—July 2015
is related to covariate losses rather than actual and
observed individual losses. When signals are chosen
properly—those that are easy to observe in near-realtime,
exogenous to the behaviours and characteristics of
both the insurer and insurees, and highly correlated with
the insured risk—suppliers of index insurance face much
lower costs associated with adverse section, moral hazard
monitoring, and validation of claims than they would if
they were offering conventional policies.
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Author(s) ORCID(s)
Jensen, Nathaniel https://orcid.org/0000-0002-2946-5771
Mude, Andrew https://orcid.org/0000-0003-4903-6613
Mude, Andrew https://orcid.org/0000-0003-4903-6613