Topic 2: Insurance

Question 1

Poor face risks e.g droughts that impact their production and income.

Fluctuations in production and income does not necessarily imply fluctuations in consumption.

But for the poor, it is more likely to happen. Why? (3)

Answer 1

Incomplete credit markets
Barriers to savings
Limits to risk sharing (group insurance)

Question 2

What macro and micro evidence supports this idea of volatility in production/income affecting poor worse?

Answer 2

Macro - as business cycle is more volatile (measured by the standard deviation of GDP) , economic development is lower (measured by GDP per capita i.e living standards)

Micro - households in Bangladesh restrict meal sizes in a seasonal pattern, thus showing consumption fluctuates.

Question 3

What does this imply the need for

Answer 3

Formal insurance.

Question 4

Why is there low insurance penetration in poor countries? (3)

Answer 4

Asymmetric information: AS and MH
Transaction costs
Low demand

(Similar to reasons for low bank accounts: AS, Costs, Trust (causing low demand!)

Question 5

Way to avoid higher costs, moral hazard etc:

and provide an example

Answer 5

Agricultural index insurance:
Delink payouts from individual losses, and look more holistically of the effect.

For example, considering historical yield of the geographical area, rather than the individual farmer’s yield, to see how much insurance to payout to them.