Abstract
Weather insurance is a financial instrument proposed to increase coverage of unprotected weather shocks in developing countries. Structuring sales as group-based products has been argued as a strategy to increase the attractiveness of index insurance, raising the question as to what impacts farmer demand for group insurance choices. We test if farmers prefer to purchase real-world insurance products as groups, and if groups of more similar individuals are more likely to demand group over individual index insurance for the upcoming season. We exogenously assign farmers into groups of similar versus dissimilar perceived farm size. We find that farmers, when offered, prefer group over individual insurance contracts, and that groups of farmers who perceive each other to be more similar in farm size are more likely to purchase in a group, but purchase less insurance on average.
Highlights
Farmers in the developing world face severe weather shocks, which are difficult to insure without formal insurance markets
We explore the demand for group insurance by dairy farmers from associations in the Northwest of the Dominican Republic, by using a lab-in-the-field experiment offering real-world index insurance for the upcoming agricultural season
While our study focuses on the developing country context, our setup could extend to developed country contexts as well, where farmers have cooperatives and experience contemporaneous covariate risk
Summary
Farmers in the developing world face severe weather shocks, which are difficult to insure without formal insurance markets This is true when farmers face common or covariate shocks, such as drought. Informal risk sharing, where farmers make indirect transfers, can help insure idiosyncratic shocks, but is rarely sufficient to insure farmers against aggregate (covariate) shocks. Weather-based index insurance, which pays out when rainfall falls below a threshold, reduces transaction costs as each farmer’s loss does not need to be verified. In this way, index insurance is typically more accurate to administer and cost effective at indemnification of covariate shocks
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