Michael Carter Index Insurance & Agricultural Development

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Dr. Michael Carter of UC Davis presented on the potential impacts of agricultural insurance on agricultural development & rural livelihoods at the Mobilizing a CGIAR Agricultural Insurance Community workshop in Washington, DC, 20-22 January 2014.

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Michael Carter Index Insurance & Agricultural Development

  1. 1. The Potential Impacts of Agricultural Insurance on Agricultural Development & Rural Livelihoods Mobilizing a CGIAR Agricultural Insurance Community Michael R Carter Department of Agricultural & Resource Economics BASIS Assets & Market Access Research Program & I4 Index Insurance Innovation Initiative University of California, Davis http://basis.ucdavis.edu January 19, 2014 M.R. Carter Impacts of Insurance
  2. 2. Potential Impacts of Insurance 1 Relax risk & capital constraints to the adoption of ’better’ technologies 1 2 3 2 Protect assets, both current & future (IBLI) 1 2 3 Insurance & asset portfolios in theory Facilitate transitions to more stable systems 1 2 5 Index based livestock insurance (IBLI) in Kenya impacts on asset protection Why IBLI impacts on consumption smoothing protect future assets Incentivize productive asset accumulation over time 1 4 Cotton in West Africa Grains in Ghana Drought tolerant maize Investing in disaster risk reduction (DR) Transition to complete financial services Will not discuss challenges of (index) insurance M.R. Carter Impacts of Insurance
  3. 3. Risk & Capital Constraints Know that risk is directly costly Income smoothing by shifting from riskier to less risky activities or portfolios of activities Deepens capital constraints also self-finance cut off by holding of ’unproductive’ assets external finance (credit) discouraged, especially by correlated risk Reducing risk via insurance that effectively transfers risk should address all three problems Note also that when twined with technology adoption, will make insurance relatively inexpensive But does it really work? M.R. Carter Impacts of Insurance
  4. 4. Risk & Capital Constraints West African Cotton (Mali & Burkina) Farmers pursue a diversified production strategy of growing their own food plus some cotton Value chain credit via group loans, but consequences of default are substantial (informal collateral) Joint liability itself discourages investment as the more a farmer produces, the more likely that some of his output will be ’taxed’ away to pay for others in the group Many report growing less cotton then they otherwise would, or by reducing financial risk exposure by investing less in the crop Result is that risk keeps these farmers poorer than they need be given the economic opportunities available to them M.R. Carter Impacts of Insurance
  5. 5. Risk & Capital Constraints West African Cotton (Mali & Burkina) Elabed et al. (preliminary) findings from Mali Identification strategy Insurance “perception” Insurance expands area planted by 20% and input use by 10-20% Adding up development impacts? M.R. Carter Impacts of Insurance
  6. 6. Risk & Capital Constraints Maize Ghana Karlan et al. findings from Ghana Identification via random offers of insurance at variable prices Extensive margin Intensive margin Capital versus insurance–which is the binding constraint? Adding up development impact? M.R. Carter Impacts of Insurance
  7. 7. Risk & Capital Constraints Ex ante analysis of DT Maize-Insurance Bundle Climate change projections suggest greater variability and increased drought risk in some of the world’s poorest regions Drought tolerance is a longstanding breeding objective. . . with new tools, renewed promise and high hopes Massive private & public sector investments Public-private partnerships (e.g., Drought Tolerant Maize for Africa, etc.) But will DT maize be adopted? Learning challenges (sometimes better than traditional cultivars as drought pressure increases, sometimes not–contrast with BT) Relatedly, highly imperfect protection for the farmer Let’s look at DT’s insurance properties and the potential complementarity of financial & agronomic technologies M.R. Carter Impacts of Insurance
  8. 8. Risk & Capital Constraints Ex ante analysis of DT Maize-Insurance Bundle M.R. Carter Impacts of Insurance
  9. 9. Risk & Capital Constraints Ex ante analysis of DT Maize-Insurance Bundle Off to design a 2x2 experimental design Note that this approach might generally be used for any improved technology or practice M.R. Carter Impacts of Insurance
  10. 10. Protect Present & Future Assets After the drought impact analysis of IBLI IBLI contract based on a satellite readings of vegetative cover NDVI Contract designed around livestock mortality data which maps NDVI into predicted mortality In 2011, a major draught led to predicted mortality rates in excess of 30% and an insurance payout Analyzed self-reported data on changes in coping strategy when insured Incomplete RCT, rely on instrumental variables M.R. Carter Impacts of Insurance
  11. 11. Protect Present & Future Assets After the drought impact analysis of IBLI M.R. Carter Impacts of Insurance
  12. 12. Protect Present & Future Assets After the drought impact analysis of IBLI Asset protection role of reduced asset sales obvious But, perhaps more importantly are impacts on consumption smoothing M.R. Carter Impacts of Insurance
  13. 13. Incentivize Asset Accumulation over Time Similar to how insurance can make risk taking prudential for uptake of risky technologies, so too it might incentivize accumulation of higher yielding but riskier assets over time Latter effect can be especially strong in the presence of asset-based poverty traps No empirical evidence (?) on this phenomenon, but a look at ex ante theoretical analysis may be instructive M.R. Carter Impacts of Insurance
  14. 14. Incentivize Asset Accumulation over Time M.R. Carter Impacts of Insurance
  15. 15. Incentivize Asset Accumulation over Time M.R. Carter Impacts of Insurance
  16. 16. Facilitate Transitions to More Stable Systems Do not want to create impression that insurance/risk transfer is the only instrument Risk reduction investments and more complete packages of financial instruments may dominate a strictly insurance strategy Even if this observation is true, risk transfer instruments may have a role to play as part of a transitional strategy M.R. Carter Impacts of Insurance
  17. 17. Thank you!

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