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.

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. 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
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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. 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. 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. 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. 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. 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. Risk & Capital Constraints
Ex ante analysis of DT Maize-Insurance Bundle
M.R. Carter
Impacts of Insurance

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. 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. Protect Present & Future Assets
After the drought impact analysis of IBLI
M.R. Carter
Impacts of Insurance

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. 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. Incentivize Asset Accumulation over Time
M.R. Carter
Impacts of Insurance

15. Incentivize Asset Accumulation over Time
M.R. Carter
Impacts of Insurance

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. Thank you!