Carter, Michael R. and Galarza, Francisco and Boucher, Stephen (2007): Underwriting area-based yield insurance to crowd-in credit supply and demand. Published in: Savings and Development , Vol. 31, No. 3 (2007): pp. 335-362.
Download (249kB) | Preview
Recent theoretical and empirical evidence suggests that risk (especially covariant risk that is correlated across producers) may discourage both the supply of agricultural credit and the willingness of small holders to utilize available credit and enjoy the higher expected incomes credit could make available to them. One possible resolution to this problem is to remove risk from the system by independently insuring it. However, conventional (all hazard) crop insurance has in almost every instance been rendered financially unsustainable by moral hazard and adverse selection problems. This paper instead analyzes two index-based insurance schemes, one based on a weather index, and a second based on measured average yields. While these index insurance products do not protect the farmer from all risks, our econometric analysis (which is based on data from the north coast of Peru) shows that they could have substantial value to the producer and could also crowd-in credit supply from lenders reluctant to carry too much covariant risk in their loan portfolios. We also show that insurance based on measured yields is markedly superior to a weather index (for both borrowers and lenders). We close by arguing that present and past public good failures justify public intervention in this area, and analyze the feasibility of a public scheme to initially underwrite the costs and uncertainties associated with area-based yield insurance.
|Item Type:||MPRA Paper|
|Original Title:||Underwriting area-based yield insurance to crowd-in credit supply and demand|
|Keywords:||Yield Insurance, Crop Insurance, Peru|
|Subjects:||G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance ; Insurance Companies ; Actuarial Studies
O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O13 - Agriculture ; Natural Resources ; Energy ; Environment ; Other Primary Products
|Depositing User:||FRANCISCO B. GALARZA|
|Date Deposited:||13. Aug 2010 14:10|
|Last Modified:||02. Jan 2016 01:05|
Alderman Harold and Haque Trina, “Insurance Against Covariate Shocks: The Role of Index-Based Insurance in Social Protection in Low-Income Countries of Africa”, World Bank Working Paper No.95, Africa Region Human Development Department, The World Bank, Washington, D.C., 2007.
Barnett Barry, “The U.S. Federal Crop Insurance Program,” Canadian Journal of Agricultural Economics Vol. 48, No.4, 2000, pp.539-551.
Barnett Barry, Black J. Roy, Hu Yingyao and Skees Jerry, “Is Area Yield Insurance Competitive with Farm Yield Insurance”, Journal of Agricultural and Resource Economics Vol. 30, No.2, 2005, pp.285-301.
Besley Timothy and Coate Stephen, “Group lending, repayment incentives, and social collateral”, Journal of Development Economics Vol. 46, No.1, 1995, pp.1-18.
Boucher Steve, Carter Michael R., and Guirkinger Catherine, “Risk Rationing and Wealth Effects in Moral Hazard-Constrained Markets: Theory and Implications for Land Titling and Rural Finance”, American Journal of Agricultural Economics, forthcoming, 2007.
Boucher Steve and Guirkinger Catherine, “Credit Constraints and Productivity in Peruvian Agriculture”, working paper, UC-Davis, 2006.
Coble Keith, Miller J. Corey, Zuniga Manuel, and Heifner Richard, “The joint effect of government crop insurance and loan programmes on the demand for futures hedging”, European Review of Agricultural Economics Vol. 31, No.3, 2004, pp.309-330.
Chambers Robert and Quiggin John, “Decomposing Input Adjustments under Price and Production Uncertainty”, American Journal of Agricultural Economics Vol. 83, No.1, 2001, pp.20-34.
De Janvry Alain, McIntosh Craig, and Sadoulet Elizabeth, “The Supply and Demand Side of Credit Market Information” Working Paper, UC-Berkeley, UC-San Diego, 2006.
Deng Xiaohui, Barnett Barry, and Vedenov Dmitry, “Is there a viable market for Area-Based Crop Insurance?”, American Journal of Agricultural Economics Vol. 89, No.2, 2007, pp.508-519.
Duncan John and Myers Robert J., “Crop Insurance Under Catastrophic Risk”, American Journal of Agricultural Economics Vol. 82, No.4, 2000, pp.842-855.
Karlan Dean and Zinman Jonathan, “Microfinance in Theory and Practice”, Research project, BASIS Research Program, University of Wisconsin-Madison, 2005.
Ghatak Maitresh and Guinnane Timothy, “The economics of lending with joint liability: Theory and practice”, Journal of Development Economics Vol. 60, No.1, 1999, pp.195-228.
Gollier Christian, “To Insure or Not to Insure?: An Insurance Puzzle”, The Geneva Papers on Risk and Insurance Theory Vol.28, No.1, 2003, pp.5-24.
Hazell Peter, Pomareda Carlos, and Valdes Alberto (editors), Crop Insurance for Agricultural Development: Issues and Experience. Johns Hopkins University Press, Baltimore, 1986.
Hess Ulrich, “Innovative Financial Services for Rural India: Monsoon-Indexed Lending and Insurance for Smallholders”, Agricultural and Rural Development Discussion Paper No.9, The World Bank, Washington, D.C., 2003.
Hess Ulrich and Syroka Joanna, “Weather-Based Insurance in Southern Africa: The Case of Malawi”, Agriculture and Rural Development Discussion Paper No. 13, The World Bank, Washington, D.C., 2005.
Jappelli Tullio and Pagano Marco, “Information sharing in Credit Markets: A Survey”, CSEF Working Paper No.36, Center for Studies in Economics and Finance (CSEF), University of Salerno, Italy, 2000.
Kalavakonda Vijay and Mahul Olivier, “Crop Insurance in Karnataka”, Policy Research Working Paper Series No.3654,The World Bank, Washington, D.C., 2005.
Knight Thomas and Coble Keith, “Survey of U.S. Multiple Peril Crop Insurance Literature Since 1980”, Review of Agricultural Economics Vol. 19, No.1, 1997, pp.128-156.
Lilleor Helene, Gine Xavier, Townsend Robert, and Vickery James, “Weather Insurance in Semi-Arid India”, Paper prepared for the Commodity Risk Management Group, Agricultural and Rural Development Department, The World Bank ,Washington, D.C., 2005.
Luoto Jill, Wydick Bruce, and McIntosh Craig, “Credit Information Systems in Less-Developed Countries: A Test with Microfinance in Guatemala”, Economic Development and Cultural Change Vol. 55, No.2, 2007, pp.128-156.
Mahul Olivier and Skees Jerry, “Piloting Index-Based Livestock Insurance in Mongolia”, World Bank Report, Mimeo, 2006.
Manuamorn Ornsaran P., “Scaling up microinsurance: the case of weather insurance for smallholders in India”, Agriculture and Rural Development Discussion Paper No. 36, World Bank, Washington, D.C., 2007.
McCarthy Nancy, “Demand for Rainfall-Index Based Insurance: A Case Study from Morocco”, EPTD Discussion Paper No. 106. International Food Policy Institute, Environment and Production Technology Division (EPTD), Washington, D.C., 2003.
Miranda Mario, “Area Crop Yield Insurance Reconsidered”, American Journal of Agricultural Economics, Vol. 83, No.3, 1991, pp.650-665.
Miranda Mario and Vedenov Dmitry, “Innovations in Agricultural and Natural Disaster Insurance”, American Journal of Agricultural Economics Vol. 83, No. 3, 2001, pp. 650-655.
Skees Jerry and Barnett Barry, “Enhancing micro finance using index-based risk transfer products”, Agricultural Finance Review Vol. 66, 2006, pp.235-250.
Skees Jerry, Black J. Roy, and Barnett Barry, “Designing and rating an area yield crop insurance contract,” American Journal of Agricultural Economics Vol. 79, No.2, 1997, pp.430-438.
Skees Jerry, Hartell Jason, and Goes Anne, “Using index-based risk transfer products to facilitate micro lending in Peru and Vietnam”, Mimeo, 2007.
Skees Jerry, Hartell Jason, and Hao Jianqiang, “Weather and index-based insurance for developing countries: Experience and possibilities”, in Sarris Alexander and Hallam David (eds.), Agricultural Commodity Markets and Trade: New Approaches to Analyzing Market Structure and Instability, Edward Elgar Publishing, Cheltenham, UK and Northampton, MA, 2006, pp.256-281.
Skees Jerry, Hazell Peter, and Miranda Mario, “New Approaches to Crop Yield Insurance in Developing Countries”, Environment and Production Technology Division Discussion Paper No.106, International Food Policy Research Institute, Washington, D.C., 1999.
Skees, Jerry, Varangis Panos, Larson Donald, and Siegel Paul, “Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?”, Policy Research Working Paper No.2812, The World Bank, Washington, D.C., 2002.
Skees Jerry, Gober Stephanie, Varangis Panos, Lester Rodney, and Kalavakonda Vijay, “Developing Rainfall-Based Index Insurance in Morocco”, Policy Research Working Paper No.2577, The World Bank, Washington, D.C., 2001.
Tarazona Alvaro and Trivelli Carolina, “Financiamiento Rural en Chepen y Piura”, Research Report, Instituto de Estudios Peruanos (IEP), Lima, Peru, 2006.
Trivelli Carolina, Carter Michael R., Galarza Francisco, Tarazona Alvaro, and Yancari Johanna, “Can Insurance Unlock Agricultural Credit and Promote Economic Growth”, BASIS Brief No.46, BASIS Research Program, University of Wisconsin-Madison, 2006.
Varangis Panos, Skees Jerry, and Barnett Barry, “Weather Indexes for Developing Countries”, in Dischel Robert S. (ed.), Climate Risk and the Weather Market: Financial Risk Management with Weather Hedges, Risk Books, London, 2002.
Wang H. Holly, Hanson Steven D., Myers Robert J., and Black J. Roy, “The Effects of Crop Yield Insurance Designs on Farmer Participation and Welfare”, American Journal of Agricultural Economics Vol. 80, No.4, 1998, pp.806-820.
World Bank, “Piloting Weather Insurance in India”, Mimeo, 2003.
World Bank, Managing Agricultural Production Risk. Innovations in Developing Countries, Report No. 32727-GLB, Agriculture and Rural Development Department, World Bank, 2005.
Zegarra Eduardo and De los Rios Carlos, “Agricultural Insurance Policy and Farmers’ Exposure to Covariant and Idiosyncratic Risk in the Peruvian Coast”, Research Report, Grupo de Analisis para el Desarrollo (GRADE), Lima, Peru, 2006.