Download This PaperInsuring the Never Before Insured: Explaining Index Insurance Through Financial Education Games
8 Pages Posted: 23 May 2011
Date Written: October 1, 2008
Abstract
The costs of uninsured risk for low-wealth agricultural and pastoral households are well documented. Risk makes people poor when it leads them to shy away from higher-return but riskier activities. Risk also keeps people poor when it leads them to pursue defensive savings strategies that cut off pathways from poverty that they could traverse via sustained accumulation of productive assets. Finally, risk depresses the development of the deep agricultural finance markets in a region that can be important to the growth and development of the small-farm sector.
Insurance is a potential solution to these problems of pervasive and costly risk. Yet, insurance is most notable for its absence in low-income rural areas. While there are many reasons why insurance contracts are not offered in these areas, the innovation of a new generation of financial technologies built around the concept of parametric or index insurance raises the prospect that insurance instruments could be made to sustainably work in low-income environments. It remains to be seen if these index insurance products can resolve the problems of poverty and thin financial markets, yet the first challenge is to innovate and pilot effective, livelihood-focused index insurance contracts for which there is effective demand.
Unfortunately, the complexity of index insurance contracts stands as a potential barrier to creating effective demand. These contracts present particular problems for populations that have little experience with formal insurance, much less complex index-based contracts. Progress requires innovative efforts to enhance the understanding and financial literacy of the people that might purchase and benefit from index insurance. This BASIS Brief details one strategy that aims to solve this problem of financial literacy for those who have never been insured.
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Sommarat Chantarat
Australian National University - Crawford School of Economics and Government ( email )
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Canberra, ACT 0200
Australia
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