index insurance: financial innovations for agricultural risk management and development · 2015. 2....
TRANSCRIPT
1
Index Insurance: Financial Innovations for
Agricultural Risk Management and Development
Sommarat Chantarat
Arndt-Corden Department of Economics
Australian National University
PSEKP Seminar Series, Gadjah Mada University
30 January 2012
Correspondence should be addressed to [email protected]
2 Correspondence should be addressed to [email protected]
Outline of my talk
Motivations
Development and implement index insurance program
Satellite based livestock insurance in Kenya
Prospects for Indonesia: Interesting research questions
3 Correspondence should be addressed to [email protected]
Insurance and Development
Economic costs of uninsured (weather and natural disaster) risk,
especially w/ threshold-based poverty traps
Insurance protect rural livelihoods and escape poverty
• Provide safety net to prevent collapse
of vulnerable populations
• Encourage investment and asset
accumulation by the poor
• Induce financial deepening by crowding
in credit market and social insurance
Insurance pre-finance effective
emergency response and recovery
• Timely response enhances resilience
to shocks and reduce costs of
humanitarian responses/social protection programs
Motivations Index Insurance Kenya Experience Prospects for Indonesia
4 Correspondence should be addressed to [email protected]
Insurance and Agricultural Risk Management 0
24
68
Density
0 .1 .2 .3 .4Kargi
kernel = epanechnikov, bandwidth = 0.0290
Kernel density estimate
Density
𝐿𝑇 𝐿∗
High frequency/ Low loss/ Idiosyncratic
Self and informal insurance effective
Low frequency/ Extreme loss/ Covariate
Need to transfer to formal risk market
Agricultural Livelihood/Income/Asset Loss
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Two types of formal agricultural insurance
Conventional crop insurance
Compensate actual loss, multi-peril or
named coverage
• High costs of verifying losses
• Moral hazard and adverse selection
• Existing programs are very costly
and largely subsidized
No successful crop insurance in the
world, not likely work in rural areas
Index insurance
Compensate specific loss based on
objectively measured index NOT actual loss
• Low costs – no farm-level loss verification
• Low incentive problems – insured cannot
influence payout probability
• Challenges in minimizing basis risk
Promise as a market viable instruments,
more suitable for rural areas in DCs
5
Developing Index Insurance Program
L*
Πlt 𝐿 𝜃𝑙𝑡 | 𝐿∗
Indem
nity P
ayout
𝐿 𝜃𝑙𝑡
1. Identify loss to be insured (𝑳𝒍𝒕)
• Identify uninsured loss by testing simple consumption risk sharing hypothesis
(e.g., Townsend 1994), 𝐿𝑙𝑡 is uninsured if 𝐻0: 𝑐 = 0 is rejected
∆𝐶𝑙𝑡= 𝑎0 + 𝑎𝑙 + 𝑎𝑡 + 𝑏𝑋𝑙𝑡 + 𝑐𝐿𝑙𝑡 + 휀𝑙𝑡
2. Select objectively measured index (𝜽𝒍𝒕)
• Highly correlated with loss, available reliably in near-real time, non-manipulable
by insured parties, high spatial distribution, at least 20 years historical profiles
3. Quantify insurable loss from index (𝑳 𝜽𝒍𝒕 )
• 𝜃𝑙𝑡 needs to explain most of the loss variations:
𝐿𝑙𝑡 = 𝐿 𝜃𝑙𝑡 + 휀𝑙𝑡 𝐿 𝜃𝑙𝑡
• Use micro data of 𝐿𝑙𝑡 to minimize basis risk
4. Identify optimal contract structure
• Payoff based on 𝐿 𝜃𝑙𝑡 : Πlt 𝐿 𝜃𝑙𝑡 | 𝐿∗ = 𝑚𝑎𝑥 𝐿 𝜃𝑙𝑡 − 𝐿∗, 0 × 𝑠𝑢𝑚 𝑖𝑛𝑠𝑢𝑟𝑒𝑑
• Stand-alone contract, group-based contract, interlinked insurance-loan
Motivations Index Insurance Kenya Experience Prospects for Indonesia
6
Developing Index Insurance Program
5. Actuarial pricing
• Actuarial fair premium: burn rate and/or Monte Carlo simulation based on 𝑓(𝜃𝑙𝑡)
𝑝𝑙 𝐿 𝜃𝑙𝑡 | 𝐿∗ = 𝐸 Πlt 𝐿 𝜃𝑙𝑡 | 𝐿∗ = Πlt 𝐿 𝜃𝑙𝑡 | 𝐿∗ 𝑑𝑓( 𝜃𝑙𝑡)
6. Ex-ante contract evaluation
• Simulated welfare and behavior response impacts using dynamic model/data
• Field experiments to elicit willingness to pay among targeted clients
7. Develop education and extension tools for pilot sale
• Simplified products, financial educational tools, targeted learning network
8. Identify cost effective delivery mechanisms
• Delivery through mobile technology, local financial institutions, network groups
9. Long-term micro-level impact assessment
• Randomized survey and experiments to elicit demand, impacts on welfare,
induced behavior responses from control and treatment groups
Motivations Index Insurance Kenya Experience Prospects for Indonesia
7
Satellite vegetation based livestock insurance in Kenya
(1) Identify loss to be insured: Catastrophic livestock losses from
drought as key uninsured risk in this area
• Observed household welfare co-move with
livestock losses Marsabit
0%
20%
40%
60%
80%
100%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Seasonal Livestock Loss (%)
Balesa
Maikona
Kalacha
Northhorr
Karare
Korr
$0.0
$0.2
$0.4
$0.6
$0.8
$1.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Average Household Consumption ($/day)Maikona
Kalacha
Northhorr
Karare
Korr
Logologo
Ngurunit
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
8
Satellite vegetation based livestock insurance in Kenya
(2) Selecting index: NASA
MODIS Normalized difference
vegetation index (NDVI) as index
• Indication of availability of
vegetation over rangeland
• Spatiotemporal rich (1×1 km2)
• Available in near-real time every
15 day (1982-present)
0
0.2
0.4
0.6
0.8
1
1981
1982
1983
1984
1985
1986
1987
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2009
2010
NDVI (1981-2010) - Lower Marsabit
Karare
Logologo
Ngurunit
Korr
-3
-2
-1
0
1
2
3
4
5
1981
1982
1983
1984
1985
1986
1987
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2009
2010
ZNDVI (1982-2009) - Lower Marsabit
Karare
Logologo
Ngurunit
Korr
1984 1987 1991 1994 1997 2000 2006 2009
Historical
Droughts
ZNDVI (1981-2010) – Lower Marsabit
NDVI (1981-2010) – Lower Marsabit
Normal year (May 2007) Drought year (May 2009)
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
9
Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep
(3) Quantify insurable loss from index: construct predicted livestock loss
from the empirical model: 𝑀𝑙𝑡 = 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡 + 휀𝑙𝑡
Satellite vegetation based livestock insurance in Kenya
𝑍𝑁𝐷𝑉𝐼𝑙𝑡
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒𝑍𝑁𝐷𝑉𝐼𝑙𝑡
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
10
Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep
(3) Quantify insurable loss from index: construct predicted livestock loss
from the empirical model: 𝑀𝑙𝑡 = 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡 + 휀𝑙𝑡
Satellite vegetation based livestock insurance in Kenya
spreTd
dss zndvipreCzndvi_
sposTd
dss zndviposCzndvi_
spreTd
dss zndvipreCzndvi_
Construct
𝑋 𝑛𝑑𝑣𝑖𝑙𝑠 variables
from cum. ZNDVI
process
𝑍𝑁𝐷𝑉𝐼𝑙𝑡
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒𝑍𝑁𝐷𝑉𝐼𝑙𝑡
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
sposTd
dss zndviposCzndvi_
11
Oct Nov Dec Jan Feb Mar Apr May June July Aug Sep
(3) Quantify insurable loss from index: construct predicted livestock loss
from the empirical model: 𝑀𝑙𝑡 = 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡 + 휀𝑙𝑡
Satellite vegetation based livestock insurance in Kenya
𝑍𝑁𝐷𝑉𝐼𝑙𝑡
𝐶𝑢𝑚𝑢𝑙𝑎𝑡𝑖𝑣𝑒𝑍𝑁𝐷𝑉𝐼𝑙𝑡
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
Regime switching model for zone-specific, seasonal mortality prediction:
𝑀𝑙𝑡 = 𝑀1 𝑋 𝑛𝑑𝑣𝑖𝑙𝑡 + 휀1𝑙𝑡 𝑖𝑓 𝐶𝑧𝑛𝑑𝑣𝑖_𝑝𝑜𝑠𝑙𝑡 ≥ 𝛾 (𝑔𝑜𝑜𝑑 𝑐𝑙𝑖𝑚𝑎𝑡𝑒 𝑟𝑒𝑔𝑖𝑚𝑒)
𝑀2 𝑋 𝑛𝑑𝑣𝑖𝑙𝑡 + 휀2𝑙𝑡 𝑖𝑓 𝐶𝑧𝑛𝑑𝑣𝑖_𝑝𝑜𝑠𝑙𝑡 < 𝛾 (𝑏𝑎𝑑 𝑐𝑙𝑖𝑚𝑎𝑡𝑒 𝑟𝑒𝑔𝑖𝑚𝑒) 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡
12
Satellite vegetation based livestock insurance in Kenya
(3) Quantify insurable loss from index: construct predicted livestock loss
from the empirical model: 𝑀𝑙𝑡 = 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡 + 휀𝑙𝑡
Predictive Performance of predicted livestock loss, 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡
• Out-of-sample prediction errors within +-10% (especially in the bad year)
• Predict historical droughts well
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
Density o
f pre
dic
ted m
ort
alit
y inde
x
13
Satellite vegetation based livestock insurance in Kenya
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
Predicted mortality index
Predicted Seasonal Mortality Index – Laisamis Contract
Predicted mortality index
(4) Identify optimal contract structure
• Insurable loss: Area average livestock loss indicated by 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡
• Seasonal indemnity payment:
Πlt 𝑀 𝜃𝑙𝑡 | 𝑀∗, 𝑇𝐿𝑈, 𝑃𝑇𝐿𝑈 = 𝑚𝑎𝑥 𝑀 𝑍𝑁𝐷𝑉𝐼𝑙𝑡 − 𝑀∗, 0 × 𝑇𝐿𝑈 × 𝑃𝑇𝐿𝑈
• Coverage: Division level, annual contract (covers two seasonal payouts)
(5) Actuarial fair premium: (% of sum insured)
14
Satellite vegetation based livestock insurance in Kenya
(6) Ex-ante contract evaluation: simulations of stochastic dynamic model
based on observed household dynamic data
Pastoral production function: Herd dynamics with stochastic environment:
Household budget constraint: Household Intertemporal problem:
• In most case, insured herd SOSD uninsured herd: insurance reduces prob. of extreme loss
• Contract seems to be effective despite the existence of basis risk!
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
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0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Stabilizes Pathway toward Growth for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Impedes Asset Accumulation for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Stabilizes Pathway toward Growth for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Impedes Asset Accumulation for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Stabilizes Pathway toward Growth for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Impedes Asset Accumulation for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Stabilizes Pathway toward Growth for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 20 40 60 80
TLU (Beginning Herd = 15 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
IBLI Impedes Asset Accumulation for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
20 30 40 50 60 700 10 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi (Beginning Herd = 30 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Reduces Probability of Extreme Herd Loss for Very Large Herd
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bility
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bility
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 30 TLU, Beta = 1)
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bili
ty
20 30 40 50 60 700 10 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi (Beginning Herd = 30 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Reduces Probability of Extreme Herd Loss for Very Large Herd
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bility
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cu
mula
tive
Pro
ba
bility
0 20 40 60 80Herd (TLU)
No Insurance 10% IBLI
15% IBLI
Kargi ( Beginning herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 20 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
IBLI Eliminates Probability of Falling into Destitution for Herd Around Critical Threshold
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 30 TLU, Beta = 1)
0.2
.4.6
.81
Cum
ula
tive P
rob
ab
ility
0 2345 20 40 60 801
TLU (Beginning Herd = 5 TLU, Beta = 1)
No Insurance 10% IBLI
15% IBLI
Minimal IBLI Performance for Very Small Herd
TLU (Beginning Herd = 30 TLU, Beta = 1)
Motivations Index Insurance Kenya Experience Prospects for Indonesia
15
Satellite vegetation based livestock insurance in Kenya
(6) Ex-ante contract evaluation: Willingness to pay experiments (210 hhs)
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
5%
6%
7%
8%
9%
Pre
miu
m (
% o
f in
su
red
va
lue)
0% 25% 50% 75% 100%
Chosen Coverage (% of household's total herd)
All sample (E = 1.75) Poor group (E=1.77)
Vulnerable group (E = 1.91) Rich group (E = 1.60)
0.0
1.0
2.0
3
Herd
siz
e d
ensity
.5
1
1.5
2
2.5
3
Pri
ce E
lasticity o
f In
su
ran
ce D
em
and
0 10 20 30 40 50 60 70 80
Herd size (TLU)
95% CIlpoly smooth
density: herdtlu
Premium Vs. Chosen Insurance Coverage Price Elasticity of Insurance Demand Vs. Herd Size
Demand determinants
(+) familiarity with fn. product
(+) with interacting financial
experience with risk aversion
(+) perceived loss profile
(+) expected loss
(+) wealth (wealth eff.)
(-) perceived basis risk
(+) credit constraint (buffer stock)
Premium Vs. Chosen Coverage
Modest demand exists at 20%+fair
Less elastic among the rich
16
Satellite vegetation based livestock insurance in Kenya
(7) Develop education and extension tools: using experimental games
with real incentives
• Replicate the pastoral livelihood in the community
• Teach how this insurance work and how it will affect herd dynamics
• The game also allows us to study hh’s behavior responses from insurance!
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
17
Satellite vegetation based livestock insurance in Kenya
(8) Identify cost effective delivery mechanisms to remote clients using
mobile technology
• The contract has been commercialized in northern Kenya since 2010
• Contracts sold to among 10% of populations in the first year
• Local insurance company underwrites the contract with Swiss Re
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Correspondence should be addressed to [email protected]
18
Satellite vegetation based livestock insurance in Kenya
• 4-year panel household survey, baseline (2009) with annual repeat
• Challenges: (i) cannot randomize eligibility for insurance
(ii) low uptake reduces power of estimating avg. treatment effects
• Hence quasi-experiment with encouragement design: use IV approach
with multiple instruments (to generate variation in insurance purchase)
• We randomize 3 instruments:
• Survey instruments: welfare, Induced behavior responses, formal/informal
access to credit, social insurance, environmental impacts
• Empirical estimations of demand determinants and impacts of insurance:
𝐹𝑖𝑟𝑠𝑡 𝑠𝑡𝑎𝑔𝑒: 𝐷𝑖𝑡= 𝛾0 + 𝛾1𝑒𝑖𝑡 + 𝛾2𝑡𝑖𝑡 + 𝛾3𝑑𝑖𝑡 + 휀𝑖𝑡
𝑆𝑒𝑐𝑜𝑛𝑑 𝑠𝑡𝑎𝑔𝑒: ∆𝑌𝑖𝑡= 𝜌0 + 𝜌1𝐷𝑖𝑡 + 𝜌2′𝑋𝑖𝑡 + 𝐷𝑖𝑡𝑋𝑖𝑡′𝜌3 + 𝛿𝑖 + 휀𝑖𝑡
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Cash transfer No cash transfer
Educated 4 sites 4 sites
Not educated 4 sites 4 control sites
(1) Insurance education (𝑒𝑖𝑡) (2) Eligibility for cash transfer (𝑡𝑖𝑡) (3) Discount coupon at 0-60% (𝑑𝑖𝑡)
(9) Long-term micro-level impact assessment
Stay tuned!
19
References
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Barrett, C.B. et al. (2008) “Altering Poverty Dynamics with Index Insurance,”
BASIS Brief 2008-08.
Barrett, C.B. and M.R. Carter (2007) “Asset Thresholds and Social Protection,”
IDS Bulletin 38(3):34-38.
Carter, M.R. et al. (2008). “Insuring the Never-before Insured: Explaining Index
Insurance through Financial Education Games,” BASIS Brief 2008-07.
Chantarat, S. et al. (forthcoming) “Designing Index-based Livestock Insurance for
Managing Asset Risk in Northern Kenya.” Journal of Risk and Insurance
Chantarat, S. et al. (2011) “The Performance of Index-based Livestock Insurance:
Ex Ante Assessment in the Presence of a Poverty Trap.” Mimeo
Chantarat, S. et al. (2011) “Willingness to Pay for Index-based Livestock
Insurance: Results from a Field Experiment.” Mimeo
IBLI official site: http://livestockinsurance.wordpress.com/
20
Prospects for Index Insurance in Indonesia
Motivations Index Insurance Kenya Experience Prospects for Indonesia
Interesting research questions
• The optimal contract design as part of existing risk management system
(complementarities with self-, informal-insurance, government programs)
• Impact assessment on welfare, productive investments, existing risk
management mechanisms
• Designs of financial educational tools
• Viability of flood index insurance (e.g., using satellite imagery?) as part of
overall flood management system