How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya

Jensen, Nathaniel and Mude, Andrew and Barrett, Christopher (2014): How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya.

Abstract

Basis risk – the remaining risk that an insured individual faces – is widely acknowledged as the Achilles Heel of index insurance, but to date there has been no direct study of its role in determining demand for index insurance. Further, spatiotemporal variation leaves open the possibility of adverse selection. We use rich longitudinal household data from northern Kenya to determine which factors affect demand for index based livestock insurance (IBLI). We find that both price and the non-price factors studied previously are indeed important, but that basis risk and spatiotemporal adverse selection play a major role in demand for IBLI.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pastoralists, Index Insurance, Uptake
• Subjects: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q1 - Agriculture > Q12 - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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