MICROFINANCE PAPER WRAP-UP: The Effect of Microinsurance on Economic Activities: Evidence from a Randomized Natural Field Experiment by Hongbin Cai, Yuyu Chen, Hanming Fang and Li-An Zhou, published by the University of Pennsylvania

By Hongbin Cai, Yuyu Chen, Hanming Fang and Li-An Zhou, published by the University of Pennsylvania, December 2010, 28 pages, available at: http://www.econ.upenn.edu/~hfang/WorkingPaper/sow/insurance11.pdf

Limited access to credit is hardly the only obstacle facing farmers attempting to run successful operations in impoverished nations; lack of access to formal insurance markets precludes them from engaging in riskier activities that might yield higher profits. Microfinance institutions (MFIs) have provided the poor with access to credit for some time. More recently, microinsurance has become available as a companion to this service, insuring the poor and protecting their products so their loans aren’t wasted if the unexpected happens. But little research exists to determine the value of microinsurance. How effective is it? And, to what extent does its availability affect farmers’ decisions?

The authors of this study devised an experiment to test whether the availability of microinsurance incents farmers to engage in riskier, but potentially more rewarding, farming practices—in this case, the raising of sows in China: a dicey endeavor given the price fluctuations of pork and a high incidence of disease among the animals. The local government in Jinsha County, China, allowed the authors to conduct an experiment testing the effects of the availability of microinsurance in 480 of the county’s 580 villages. Since 2007, farmers in China have had access to government-subsidized insurance for their sows underwritten by the Property and Casualty Company (PCC) of the People’s Insurance Group of China, a Chinese insurance conglomerate. Local animal husbandry workers (AHWs) serve as an intermediary between the PCC and farmers, promoting policies and processing claims. Because of infrastructure limitations including bad roads, the AHWs are vital to the program’s success, although they are paid very little.

The authors created three groups of AHWs to encourage different levels of microinsurance promotion: a control group of AHWs in 120 villages who each received CNY 40 (USD 6) for participating in the study with no additional incentives, a group of AHWs in 120 villages who received CNY 20 (USD 3) plus CNY 2 (USD 0.30) for each sow they insured and a group of AHWs in 240 villages who received CNY 20 as participatory compensation and CNY 4 (USD 0.60) for each insured sow. The incentive program ran for approximately one month. Data on insured sows and total sows was collected during the program and both three months and six months after the conclusion of the program.

Using incentivized AHWs to serve as a proxy for greater microinsurance availability in the villages, the authors found that an increased availability of microinsurance incents farmers to insure and raise more sows. During the incentive program, each farmer was insuring an average of 9 more sows than the control group in the case of the low-incentive AHWs, and 12 more sows than the control group for the highly incented AHWs. Furthermore, the authors contend that by prompting farmers to engage in these activities, microinsurance also increases production. After three months, roughly 7 and 9 more sows were being raised per farmer in the low-incentive and high-incentive groups, respectively, as compared to the control villages: with insurance, farmers were more likely to engage in the risky business of raising sows. The authors believe the results highlight microinsurance’s potential as a poverty alleviation tool. But they did, however, concede that their proxy for microinsurance availability was imperfect, and, despite the evidence they found, more research needs to be done to determine how well microinsurance complements microcredit.

By John Howard-Smith, Research Associate

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