PROJECT 2: A NEW APPROACH TO WEATHER INSURANCE: SIMPLE WEATHER SECURITIES IFPRI Team:
Project Duration: Objectives of project
Ruth Vargas Hill, Miguel Robles, and Yanyan Liu March 2010- March 2011 (Ethiopia); May 2010-December 2012 (India)
Risk characterizes everyday life for many of the world‘s poorest households. When this risk is uninsured, it poses a considerable cost to current and future welfare, as harmful events lead to reduced consumption and asset loss. The lack of efficient risk mechanisms, including functioning insurance markets, can explain common poverty trap situations in the developing world. Weather-indexed insurance products have potential to help mitigate the impact of uncertain rainfall on the incomes of the rural poor. Demand for these products, however, has been limited, and expectations for the potential of these products have not yet been met. In this research project, a new approach to the provision of weather insurance is proposed and tested. The new approach builds on the advantages of index-based products.
Research Approach
The main innovation of the proposed new approach is to move away from single insurance policies calibrated to compensate average losses in favor of several simple weather securities—―weather tickets‖—with fixed payments. These securities solve a number of problems faced by standard weather-index approaches—they are easy to understand and they are flexible, allowing farmers to choose a portfolio of securities depending on their particular risk profile and allowing all economic agents facing weather risks to participate. The project has utilized both an experimental game in Ethiopia, in which participants were assigned a random endowment and offered six weather securities with fixed payouts, and a pilot provision in Ethiopia, in which farmers paid out-of-pocket for six weather securities with larger fixed payouts. Based on findings in Ethiopia, a similar project was started in India.
Progress, Research Results, and Major Research Findings in 2010
In Ethiopia in 2010, we worked with Nyala Insurance Company. 774 farmers were insured with a total sum insured amount of about $52,500. In India (Madhya Pradesh), we started joint work with HDFC-ERGO insurance company to launch an intervention in 2011 to offer insurance in 60 villages (app. 7000 households).
Data collected during both the experimental games and the pilot provision in southern Ethiopia suggests that these securities can be easily understood and can fit heterogeneous farmer needs. We found that farmers‘ rainfall needs vary across crop and other characteristics and that some of these factors also explained purchases of weather securities in the pilot. To the extent that the results show substantial heterogeneity in rainfall needs and purchases within quite small locales, it motivates further work on these programs as useful insurance tools for rural farmers.
The approach was a winner (selected from more than 800 applications) in the grant competition ―Marketplace on Innovative Financial Solutions for Development 2010.‖ As a result it sparked considerable interest among a variety of private and public sector institutions working in this area: Allianz, the World Bank, IFC, WWF-US, IADB, IICA, Oxfam America, BASIX, Caribbean Risk Managers Ltd, Endurance Reinsurance Corporation of America
Plans for 2011
In 2011, in both India and Ethiopia, we will target about 7,000 households in 60 villages. We will continue to work with the Nyala Insurance Company and HDFC-ERGO. The project‘s 2011 work includes a wide scale impact evaluation in India in collaboration with CIRM and a widescale impact evaluation in Ethiopia in collaboration with the University of Oxford.
PROJECT 3: USING STOCHASTIC PROFIT FRONTIER ANALYSIS TO CONSTRUCT TYPOLOGIES OF RURAL MICRO REGIONS
IFPRI Team: Project Duration: Objectives of the Project
Poverty maps and the applications of cluster analysis are the main contributions that development economists have made to the first three stages of the policy process: problem definition, policy formulation, and selection of a preferred policy option. These tools have proven to be extremely useful due to their simplicity and directness in identifying populations with urgent needs and common traits, but are somewhat limited because of their one-dimensionality and lack of grounding on a more rational, rigorous, and systematic approach.
The stochastic frontier approach provides an ideal framework to build the typology of rural micro-regions. The stochastic approach is developed from a theory of producer behavior in which motivation is the standard optimization criteria (minimize costs or maximize profits), but in which success is not guaranteed. The associated estimation procedures allow for failures in efforts to optimize and for differing degrees of success between producers. This allows for the analysis of the determinants of variation in the efficiency with which producers pursue their objectives.
2010 Internal Program Review-Markets, Trade and Institutions Division Page 17
Maximo Torero, Eduardo Maruyama, Carlos Martins-Filho, Maribel Elias, and Camila Alva October 2008 – September 2011
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