Informing micro insurance contract design to mitigate climate change catastrophe risks using choice experiments

Abstract

The main objective of this paper is to assess demand for catastrophe insurance in one of the most flood-prone developing countries in the world and to estimate rural household willingness-to-pay for different micro insurance policies to reduce catastrophic flood risks and socio-economic vulnerability. A large-scale rural household survey was conducted targeting more than 1,200 heads of households in five different risk-prone districts in Bangladesh located along the three major rivers in the country. All of these areas were severely affected by the catastrophic floods in 2004. Novel in this case study is the design of a stated choice experiment that allows testing of the conditions under which rural household heads favour micro flood insurance. Although hypothetical, this provides important indications of rural household demand for different types of micro flood insurance under different contractual design and provision conditions, such as insurance sum and premium. Besides geographical differentiation, tests were also included for market segmentation based on occupational activities. Most interviewed households are interested in micro flood insurance to protect themselves against the negative impacts of catastrophic floods, especially crop insurance. However, as expected, the affordability of insurance premiums plays an important role.