The role of microcredit and microinsurance in coping with natural hazard risks Sonia Akter1 and Naureen Fatema2
Corresponding author: Crawford School of Economics and Government, The Australian National University, Canberra, ACT 2601, Australia, E-mail: email@example.com, Tel: +61 2 6125 1221, Fax: +61 2 6125 8448 2
Department of Economics, McGill University, Canada.
ABSTRACT The study investigates the role of post disaster credit market access in determining micro-cropinsurance demand in the rural floodplains of Bangladesh. In a double bounded contingent valuation study, over 500 flood stricken farmers were asked for their preferences to pay premium to protect themselves against crop damage risks. Our results show a negative relationship between farmers’ access to post disaster microcredit and their willingness to pay premium for a crop insurance contract. This finding was consistent across institutional characteristics of the rural credit market. This result has a number of policy implications. The most important of all is that the recent and growing trend of offering compulsory bundled insurance scheme is likely to curb the demand for microfinance products that are linked with weather related income generation activities in developing countries.
Key Words: Flood, crop insurance, microcredit, Asia, Bangladesh
Acknowledgements The work presented in this paper is part of the Poverty Reduction and Environmental Management (PREM) program in Bangladesh funded by the Dutch Ministry of Foreign Affairs. We gratefully acknowledge the cooperation of the following organizations at various stages of this research: Bangladesh Water Development Board (BWDB), Climate Change Cell (CCC) at Department of Environment (DOE), Flood Forecasting and Warning Center in Bangladesh (FFWC), Water Resource Planning Organization (WARPO) and Geographic Information System (GIS) cell in Local Government Engineering Department. We, furthermore, thank Professors Robert D. Cairns, Sonia Laszlo and Roy Brouwer for their valuable inputs.
Microcredit and microinsurance are often referred to as important and effective ex post natural hazard risk coping mechanisms (Brouwer et al., 2007, Khandker, 2007, Botzen and van den Bergh, 2008; Brouwer and Akter, 2010). Accordingly, natural hazard risk insurance programmes have been introduced alongside the existing microcredit programs in many developing countries in order to help the poor cope with increased climatic disaster risks (Mechler et al., 2006; Akter et al., 2009). In majority of the instances, such insurance products are offered by microfinance institutions that traditionally and predominantly focus on the provision of microcredit (ProVention/IIASA, 2006). In some cases, providers offer microinsurance products bundled with microcredit loans. Such schemes require the uptake of insurance as a condition for extending loans or savings arrangements to the microfinance clients. For example, a variant of index-based insurance was implemented in Malawi that offers microlending together with mandatory crop insurance contract (ProVention/IIASA, 2006).
Bundled insurance schemes have three key supply side advantages. First, the system enables the insurer to diversify risks by adding other risks to the portfolio that are uncorrelated across clients. Second, adverse selection is reduced if clients are obliged to purchase the insurance, including those facing low risk of natural hazard. Third, if the insurance is offered jointly with other products, transaction costs are lower than if they were sold separately. Despite these advantages from the provider’s viewpoint, there is a real risk that bundled insurance may affect the take-up rate of weather insurances by reducing its popularity among insurance clients. Although both microcredit and microinsurance helps risk coping and microcredit is often referred to as implicit insurance against natural hazards (Brouwer...
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