Demand for Insurance

Farmers in low income countries presently use a variety of mechanisms to manage risk, including risk related to variation in crop income. There’s been recent interest in introducing new financial assets to improve farmers’ ability to manage such risks, such as contracts that have payoffs related to rainfall. One of the most important lessons from finance is that the value of a new asset depends on how its returns are related to the returns on an entire portfolio of assets. We formulate the portfolio problem facing the farmer, and describe methods adapted from the finance literature which may help to value these new assets. It’s been observed elsewhere that demand for these new weather-contracts is low. But just because demand for one “insurance” instrument is low doesn’t mean that insurance is unimportant. We further describe a framework which can be used to measure the total insurance provided by the portfolio of assets held by the farmer.

Ligon, E. "Demand for Insurance" Ferdi, Policy brief B76, September 2013