Insurance for the Poor? Stefan Dercon Oxford University Beijing 2007 Risk is Very Costly for the Poor Poor live in high risk environment With high welfare costs: Short-run: consumption/nutrition shortfalls E.g Ethiopia drought 2002? 16% lower consumption Long-run: persistent effects E.g. Ethiopia rural growth in 1990s lower for those affected by 1984-85 famine Making risk a cause of poverty persistence Loss of assets/health/human capital in crisis Avoidance of high return activities to keep risk low How to design better protection? Taking into account: interventions (micro)credit activities, especially using groups safety nets Starting from people’s risk strategies mutual support (‘risk sharing’) via networks and groups The problem of insurance Problem with groups covariate or catastrophic risks Problem with insurance provision information problems (adverse selection and moral hazard) Administration costs Problems with risk Risk perception errors Uncertainty/Ambiguity 1. Build on Existing Groups Partnership of existing ‘groups’ (self-help groups, cooperatives, funeral societies) To handle covariate/catastrophic shocks Avoids adverse selection Reduces costs including of monitoring (‘delegated monitor model’) Avoids crowding out of informal support networks Given much ambiguity, mutual insurer model (=make groups shareholders) superior to just offering insurance to groups 2. Tailor products to problems Different risks have different informational/verification problems Health – adverse selection Crop failure – moral hazard/verification Death – no incentive problem (verification?) Property/fire – moral hazard Innovations SEWA: life insurance Indexed Products for Rainfall 3.“Insurance is always sold but never bought Designing product easy and hypothetical demand is high Insurance uptake is rarely swift or high Ambiguity can help to explain Increases costs and reduces benefits Investing in data and in education about insurance… Rainfall insurance experiments: success but (s)low uptake. Dangerous! Advantage of dealing with groups. 4. Insurance crowds out credit Individual credit provision: If enforcement is imperfect in credit market, then making defaulting on loan less painful would reduce credit provision (as incentives to be careless are stronger) Group-based credit provision: Insurance would undermine incentives for repayment by group 4. Implications of crowding out? Problem is especially there for ‘businessrelated’ risks (with moral hazard); There would be a case for monopoly power for credit and insurance provision in poor settings Case for interlinked contracts within microfinance; Crowding out of credit with safety nets? Indexed products would help (rainfall); E.g. workfare programmes? Exception: if repayment perfectly enforceable, insurance would crowd in credit. E.g. Fertiliser in Ethiopia. 5. Is microcredit is overrated? Emphasis on microcredit and productive asset creation by the poor for poverty reduction is EXCESSIVE. As if poverty reduction is best achieved via enterpreneurial activities… Evidence on welfare impact of credit: Karlan and Zinman (2006).: substantial from impact offering consumption credit 6. Joined-up thinking Microinsurance, savings, microcredit and safety nets: all mechanisms to fix failures of credit and insurance markets in a context of many ‘informal’ risk strategies already used Allow people long-term planning beyond resource constraints at particular periods of time or ‘states of nature’ Most cost-effective solution from integrating thinking around all of them, with trade-offs and complementarities.