Emerging Insight: When insurance backfires for farmers
10 May 2015
We have previously seen how insurance can help farmers to avoid burdensome coping strategies. For example, insured farmers in Kenya were less likely to expect to sell livestock or reduce their consumption as a result of drought. Surprisingly, new results show that these expectations don’t always come to fruition.
The MicroInsurance Centre’s Microinsurance Learning and Knowledge (MILK) project studied drought-related costs and financing for maize farmers in Dedougou, Burkina Faso, and the role that Allianz’s maize loan protection insurance product played in coping with a drought. It found that insured farmers relied on more burdensome coping strategies after a drought than their uninsured counterparts. The costs of a drought in 2012 were nearly identical for both insured and uninsured farmers in the study. However, insured farmers borrowed more, reduced consumption more, and worked more hours to cope with the drought than the uninsured.
The reason for the less favourable result is that clients did not have a good understanding of the product and its complexities. The product is designed to relieve some (but not all) of the burden of loan repayment, and the proportion of the loan forgiven depends on the severity of the shock. In 2012 the drought was relatively innocuous, and about 19 per cent of the loan was forgiven. Yet the study found that 73 per cent of farmers had expected the entirety of their outstanding loan to be forgiven in the event of a drought. As a result, insured farmers limited their risk mitigation behaviour and were forced to use more burdensome coping strategies when the drought hit.
This finding shows how poorly-understood insurance products can backfire. It is important that insurers take into account the ways in which farmers already mitigate risks, such as income diversification strategies, and how they may adjust these based on their expectations of the insurance policy. This has important consequences for product design and for client information and education.
Our last Emerging Insight explored why farmers often underestimate the cost of risks and how insurers can teach farmers to estimate the full impact of risks and make more informed decisions. This study shows that understanding is equally important for those who do have insurance. Unless farmers are able to both estimate risks and understand product features and benefits, they will not reap the full benefits of insurance.
This study, along with another on credit life insurance in Indonesia, was commissioned by Allianz and carried out by the MicroInsurance Centre and EA Consultants, with field support from Planet Guarantee. While the parallel study in Indonesia found clear positive results for an Allianz insurance product – families covered by life microinsurance were able to better cushion the impact of a death than families without insurance cover – that study also identified a lack of understanding of the product on the part of clients. Allianz is using the results of these studies to implement positive changes, and the reactions from management in both Burkina Faso and Indonesia can be found here.
The MicroInsurance Centre’s Microinsurance Learning and Knowledge (MILK) project studied drought-related costs and financing for maize farmers in Dedougou, Burkina Faso, and the role that Allianz’s maize loan protection insurance product played in coping with a drought. It found that insured farmers relied on more burdensome coping strategies after a drought than their uninsured counterparts. The costs of a drought in 2012 were nearly identical for both insured and uninsured farmers in the study. However, insured farmers borrowed more, reduced consumption more, and worked more hours to cope with the drought than the uninsured.
The reason for the less favourable result is that clients did not have a good understanding of the product and its complexities. The product is designed to relieve some (but not all) of the burden of loan repayment, and the proportion of the loan forgiven depends on the severity of the shock. In 2012 the drought was relatively innocuous, and about 19 per cent of the loan was forgiven. Yet the study found that 73 per cent of farmers had expected the entirety of their outstanding loan to be forgiven in the event of a drought. As a result, insured farmers limited their risk mitigation behaviour and were forced to use more burdensome coping strategies when the drought hit.
This finding shows how poorly-understood insurance products can backfire. It is important that insurers take into account the ways in which farmers already mitigate risks, such as income diversification strategies, and how they may adjust these based on their expectations of the insurance policy. This has important consequences for product design and for client information and education.
Our last Emerging Insight explored why farmers often underestimate the cost of risks and how insurers can teach farmers to estimate the full impact of risks and make more informed decisions. This study shows that understanding is equally important for those who do have insurance. Unless farmers are able to both estimate risks and understand product features and benefits, they will not reap the full benefits of insurance.
This study, along with another on credit life insurance in Indonesia, was commissioned by Allianz and carried out by the MicroInsurance Centre and EA Consultants, with field support from Planet Guarantee. While the parallel study in Indonesia found clear positive results for an Allianz insurance product – families covered by life microinsurance were able to better cushion the impact of a death than families without insurance cover – that study also identified a lack of understanding of the product on the part of clients. Allianz is using the results of these studies to implement positive changes, and the reactions from management in both Burkina Faso and Indonesia can be found here.