by Harounan Kazianga, Oklahoma State University and Zaki Wahhaj, University of Kent. Discussion paper KDPE 1803, March 2018.
Non-technical summary:
Large segments of the population in developing countries, especially in rural areas, have a high level of vulnerability to weather-related shocks, but have limited means to insure themselves against them. In recent years, microfinance institutions have experimented with insurance products, in particular rainfall index insurance, to address this need in different parts of the world. But the uptake of these products has generally been very low because of liquidity constraints and unfamiliarity with formal financial products.
We present findings from a pilot study exploring how existing ties between urban migrants and rural farmers can be used to provide the latter improved access to formal insurance. The study was motivated by well-established evidence regarding the use of rural-urban migration as a risk-coping and risk management strategy and that rural households in developing countries often rely upon assistance from close relatives among urban migrants to cope with adverse weather-related shocks. The advantage of marketing the product to urban migrants is that they are easier to access for the insurance provider, thus lowering transaction costs; they are likely to have more experience with formal financial products; and they are likely to be less financially constrained when required to pay for the policy. To test this hypothesis, we collected contact information on all individuals who had migrated to urban areas from a random sample of rural households from villages close to Ouagadougou, the capital city in Burkina Faso. The urban migrants were contacted and offered subscription to an insurance policy for agricultural plots farmed by their rural relatives. The exercise generated an uptake rate of 22% among the urban migrants, over the two-week period of the trial, comparable to uptake rates in rural areas where the product has been offered and marketed for a number of years.
The uptake rate was higher (by 17-22 percentage points) among urban migrants who were randomly offered an insurance policy in which payouts would be made directly to the rural farmer rather than the urban migrant. In the focus group discussions conducted prior to marketing, urban migrants explained that they preferred this option because of the possible temptation to use an insurance payout, intended for their rural relative, for some other purpose. We also find that the uptake was higher among urban migrants who reported at least one shock covered by the policy suffered by their rural relative in the preceding 5 years. However, the shock reports of the urban migrants and the rural relatives do not correspond and the uptake rates do not respond to shocks reported by the latter.
The pilot demonstrates that it is feasible to market rainfall index insurance via urban migrants. Additionally, the evidence suggests that rainfall index insurance can complement informal risk-sharing networks by improving information about adverse shocks within the network and mitigating self-control issues that may cause funds to be diverted to other uses.
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