Can We Relax Liquidity Constraints in Micro-Insurance Demand?

Piloting an Innovative Design for Agricultural Insurance

Despite the apparent benefits of agricultural insurance, farmer demand for such insurance in developing countries is often rather low, even when premiums are heavily subsidized. It is widely believed that both liquidity constraints and lack of trust in insurance providers play an important role in low take-up of micro-insurance in developing countries. This project proposes an innovative insurance design which allows farmers to enter into an insurance contract while delaying payment of the premium until the end of the insuring period by issuing a credit voucher. This design ensures that farmers do not face liquidity constraints when they make the decision to buy insurance. It also helps ameliorate farmers’ fears of a worst-case insurance scenario: paying a premium and having the insured event occur, but not receiving an indemnity. The design is expected to increase insurance take-up by farmers in developing countries.

The project aims to 1) incorporate the innovative design into an existing swine insurance product in Zizhong, Province of Sichuan in China and 2) randomly select households to receive the credit voucher so as to scientifically test the effectiveness of the design in increasing insurance take-up.