UMD study shows farmers would insure against loss if offered different choices for index-based insurance and coverage levels.
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The right type of insurance could protect the livelihoods of farmers in the developing world from losses due to natural disasters. Despite the promise shown by pilot programs, most farmers haven’t been willing to buy insurance without large subsidies. The reason could be that insurers aren’t offering the right products. According to a new study led by UMD, offering farmers more flexibility in choosing policies could lead to greater insurance uptake.
The study, which appears in the Journal of Development Economics, looks at index-based insurance, which ties payouts to an index like weather or average crop yields instead of reported losses. A problem with this kind of insurance is that sometimes farmers will suffer losses when the index fails to trigger payouts. The study shows that if farmers in developing countries could choose the trigger that leads to a payout in addition to the level of coverage, many would likely choose to insure against catastrophic losses. Government-sponsored programs in the US, Canada and Spain all offer insurance that allows these kinds of choices.
You can read more about this work by professor Erik Lichtenberg on the Department of Agricultural and Resource Economics’ website.
