for internal use only presentation by shahid vaziralli, center for microfinance, ifmr january 12,...
TRANSCRIPT
for internal use only
Presentation by Shahid Vaziralli,
Center for Microfinance, IFMR
January 12, 2011
Barriers to Household Risk Management: Evidence from India
Shawn Cole Xavier Gine Jeremy Tobacman(HBS) (World Bank) (Wharton)
Petia Topalova Robert Townsend James Vickery(IMF) (MIT) (NY Fed)
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Introduction Theory suggests households should diversify idiosyncratic risk.
Yet, most individuals (and countries) hold idiosyncratic risk even when publicly observable / exogenous: e.g. exposure to house price risk, local weather fluctuations,
commodity prices, regional income growth etc. Sometimes hedging markets have simply not developed, in other
cases they exist but are not widely used.
Shiller (1998): “It is odd that there appear to have been no practical proposals for establishing a set of markets to hedge the biggest risks to standards of living”
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Introduction Research Question: Why don’t more households
participate in formal markets when available?
We study participation in a retail-level rainfall insurance product offered to rural Indian households. Test theories of insurance demand using a randomized evaluation in
Gujarat
Setting where diversification benefits appear particularly high: Nearly 90% of households in our study area cite rainfall shocks as
most important risk faced by the household.
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Outline
Motivation
Product Description
Setting, Sample, and Research Design
Determinants of Adoption
Conclusion and Future Research
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Motivation
Agriculture is the primary activity of 2/3 of India (and 40% of the world)
Rainfall is an important determinant of yield and revenue
Lasting, successful, unsubsidized crop insurance is practically non-existent National Agricultural Insurance Scheme has been disappointing
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Motivation (cont…)
Is it strange why enough people don’t buy it? Households use a range of ex-ante and ex-post mechanisms to
smooth consumption and labor Saving, intra-household transfers, grow safer crops etc.
Some evidence that these are: Insufficient, especially for poor households. Costly, in the sense that they trade-off risk for lower return. Poor hedges against shocks that are aggregate to all households
in a village, such as a drought.
Demand for weather insurance if the product can be used to hedge risk more cost effectively.
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Outline
Motivation
Product Description
Setting, Sample, and Research Design
Determinants of adoption
Conclusion and Future Research
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Product Description Index-based Insurance on rainfall
Payouts based on rain measured at local rainfall station, relative to different thresholds
Sold within 30km of station by partner NGO Coverage period spans from June 1 to August 31
Expected payouts range from 50% to 57% of premium
Catastrophe insurance
Policies underwritten by IFFCO-Tokio
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Expected Payouts
IFFCO-Tokio Policies
Year Station Premium Rs.% of
premiumGujarat
2007 Ahmedabad 44 25 57%2007 Anand 72 n.a. n.a.2007 Patan 86 43 50%
Expected payout
Normal Rain
607.4783.6389.9
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Key Benefits of Product
Reduces transaction costs
Data collection is relatively cheap
Objectivity of index construction
Historical rainfall data can be used to set prices
Divisible (policies as cheap as Rs. 44) and easy to purchase
Fast settlement and payment
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Key Limitations
Basis Risk (Rainfall imperfectly correlated with income and consumption) Correlation between rainfall and crop yields Correlation between rainfall at gauge and plot
Expensive, in part due to small scale. Payout 50-57% of unsubsidized premium
Complicated to understand and evaluate
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Outline
Motivation
Product Description and Simple Calibration
Setting, Sample, and Summary Statistics
Determinants of adoption
Conclusion and Future Research
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Gujarat Setting and Sample
100 villages in three districts (Ahmedabad, Anand, Patan)
Part of a five-year impact evaluation study
Fifteen households interviewed in each village
SEWA (NGO) sells IFFCO policies
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Education and Financial Literacy
Low level of financial literacy (as good as guessing)
Limited understanding of insurance product
Highest level of education:Primary school or below 42.0%Secondary school 28.7%High school 11.6%College or above 17.6%
Average Score, Financial Literacy 35.8%
Average Score, Insurance Questions 68.2%
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Uptake and persistence
Significant correlates of insurance uptake Wealth Financial literacy and probability skills (measured through a series of
questions in the survey) Household has other types of insurance products Surprisingly, aversion to risk does not increase uptake
Of the households who purchased the policy in 2006, 40% purchased the following year Indicating that rainfall insurance has yet to receive widespread
acceptance amongst farmers
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Outline
Motivation
Product Description and Simple Calibration
Setting, Sample, and Summary Statistics
Determinants of Adoption
Conclusion and Future Research
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Field experiments
Design of treatments guided by potential barriers to adoption:
Theoretical determinants of willingness to pay Price (relative to actuarial value) Aversion to risk Not enough cash on hand Perception of basis risk Size of risk
Non-standard – financial literacy, trust in the provider, religious cues in marketing materials
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Experiment: Price
Motivation: Financial services expensive to provide in poor areas
Insurance premium ranges from Rs. 44 - Rs. 86 (USD 1 – USD 2)
Sample: 1,415 households
Intervention: Randomly assign discounts to households
Offer discount of Rs. 5, 15, or 30 for first policy purchased Expected payout ranges from 54%-181%
Price elasticity of demand on order of 0.8 (significant at 1%)
53% of households decline policy with expected gross return of 181% return over four months
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Experiment: Trust
Motivation Households may be less inclined to purchase products from unfamiliar
sources
Sample: 2,391 households
Interventions 1: Including religious symbols and cues on flyers 2: Emphasizing the SEWA brand through videos
Results Intervention 1
Muslim households are 33% less likely to purchase a policy when the flyer includes Hindu symbols (significant at 5% level)
Hindu households are 10% less likely to purchase a policy when flyer includes Muslim symbols (significant at 5% level)
Intervention 2 Surprisingly, SEWA Brand emphasis has main effect of zero despite
evidence from other studies that branding is significant
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Conclusions
Adoption of innovative products may be slow Overall uptake was 26% among households receiving a video or flyer
Insurance demand is sensitive to price
Non-standard factors such as trust are important. First experimental evidence for role of trust in financial market participation
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Policy Recommendations
Increase density of rainfall gauges
Foster competition in the market
Combine rainfall and crop-yield insurance
Combine product with a loan
Group policies
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FIN