Microinsurance in Kenya

An initiative provides crop insurance to 22,000 Kenyan farmers via cellphone and solar-powered weather stations, making it the largest on the continent. It is financed in part by Syngenta and the IFC. Note, this is mostly a press release disguised as a news article:

Each farmer who buys insurance is linked to the nearest weather station — no one is more than 20 kilometres from a station. If the weather station shows that the rainfall was insufficient early in the growing season, or too much late in the corn season, all the farmers in that area get an automatic payout — farmers do not have to file a claim.

If the rainfall was only slightly off, farmers get a small payment. If the weather was extreme enough to destroy their whole harvest, they get the full amount. No farm visits are necessary. … The shop owner is given a camera phone to record the purchase, which instantly sends a confirmation text message to the buyer. At the end of the growing season, payouts go electronically to the farmer’s cell phone account. It is remarkable that even for small farmers, text messaging and online banking are old friends that provide a comfort level with a new programme. The programme uses the M-Pesa money transfer system. …

The biggest cost is sending the text message welcoming the new client. … [DW - I have to think this is a joke because a little later it says] Forty per cent of the project’s budget goes to pay for trainers who work with farmers, a telephone help line and radio programmes about insurance. Kilimo Salama expects that this expense will drop as the product becomes more familiar. It aims to be commercially viable in three years.

More on the difficulties of providing microinsurance below the fold. Or you can read about ILRI's similar program here or watch a video.

Obvious Things I Never Knew

"But the whole logic of life insurance completely fails to apply to retired people."

Well, of course not. So why is the AARP marketing the stuff to its members?

Yglesias, in pointing out that being ripped off is not just for tourists in developing countries, lottery ticket purchasers, and fortune teller visitors adds:

But if you look at the price premium people are willing to pay for “organic”-labeled products and the dubious science behind the theory that these products are superior to conventional varieties, I think it’s clear that yuppies aren’t immune to getting ripped off, either. And I think we should be open to the possibility that this is happening in finance. How much do the sundry pension fund beneficiaries, 401(k) holders, endowed nonprofit managers, etc. of the world really know about the investment game? Are they really that much more savvy and sophisticated than their working class lottery ticket buying peers? Or does their self-image as savvy sophisticates make them that much more prone to being ripped off? After all, Bernie Madoff was able to swindle a bunch of very sophisticated investors out of a great deal of money. He did it through actual, prosecutable, criminal fraud. But not every scam and ripoff is a fraud, and not everything that’s legal is a mutually beneficial transaction.

New financing options for SSA farmers

The proposed solution in South Africa: make more middlemen.

The bank gives loans to a contractor instead of directly to the farmer. The contractor then subcontracts the farmer to grow food or raise cattle. The contractor takes on the risks both of farming and of default.

"What we have essentially done is to remove the risk from the farmer and we carry the risk ourselves. We lease the land from the farmer and he is then contracted to us to grow crops according to our agreement and gets paid," he said. "They do not even worry about prices because we never enter into a scheme without hedging the prices as we are not in the business of speculating on prices."

From Food Insurance to Starvation in One Easy Post

Camplin traces the devolution our food system would see if consumers bought food insurance instead of food. While it highlights some of the issues in our health system [e.g. price increases are largely demand driven], it ignores others, like the asymmetric information problem between patients and doctors or the fact that we all need to eat several times a day while we may go for years between visits to the hospital.

WIDER Panel: Global Food Crisis and Response

Per Pinstrup-Andersen (yay!): The Political Economy of Food Price Policy (our next project)
The former and current heads of IFPRI largely agree on where the world is and is heading.
He references my work: almost all the increase in hungry people in Africa is from the Dem Rep of Congo
"I do not believe FAO's recent numbers."
Why? 1 - Price transmission from int'l to national is very low in countries with poor infrastructure and in China
US rice prices spiked highest for international Thai rice, 20% lower in Philippines and Egypt, 60% lower in India and China
But if prices didn't increase in China and India, the number of hungry people must have increased enormously in other countries based on FAO
Wheat prices went up more in Egypt than internationally. Maize prices went up in Kenya but didn't come down for national, not int'l reasons.
Global stock increase: 25% for rice and wheat
Terrible lack of commitment to putting plans into action. (more of my research behind that one)
Agrees with Fan's #1 Priorities. Priority #2: double public investment in ag to increase production sustainably: win-wins are possible
3 - incentives for private sector to invest in sustainable ag (saving and credit institutions for farmers, risk management, public goods)
Need to regulate land grabbing (and enforce them) and internalize environmental externalities (full-costing, PES, polluter pays)
Full costing will have to be international to be effective, and I'm not very optimistic if we can get the agreement.
He puts up our diagram of a modified environmental kuznets curve showing win-win-win: reducing poverty, hunger, and soil degradation at once.
"I'm probably the only one in the room who believes real food prices are going to continue down again. Please talk to me."

Alain de Janvry and Joachim von Braun below the fold

Livestock insurance

For more information on the ILRI program I blogged about earlier with ILRI's video, see here for the Cornell Chronicle's story about a Cornell graduate student's influence on the program. Among the points that auger well:

• "We conducted extensive household surveys to make sure the product we designed matched with what they really want," Chantarat said.
• The researchers also held information sessions in which they used experimental games that replicate common livestock-keeping activities to demonstrate how insurance works and to study how households react to the new product.
• The model is designed to be market viable, Chantarat said, but the follow-up research will help determine whether subsidizing premiums for the poorest herders could boost the program's ultimate effectiveness in combating severe poverty and vulnerability.

Another Bag o Blog Links

In regards my earlier post on focusing on the right issues, it only improves workplace efficiency if you're focusing on the binding constraint.

The USDA appears to be slow in posting LAST year's dairy report ... by a good six months now. Any sign of it?

On the lack of evidence that health insurance reduces mortality risk

On teacher performance pay: "Even the federal General Schedule (GS) pay system is more flexible and market-based then those found in most traditional public schools. Civil servants advance through the GS not only in 15 grades, but also along 10 pay steps based on merit and experience (Ballou & Podgursky, 1997). ... We conclude that while the empirical literature is not sufficiently robust to prescribe how systems should be designed—for example, optimal size of bonuses, mix of individual versus group incentives—it does make a persuasive case for further experiments by districts and states, combined with rigorous, independent evaluations." Hat tip: MR

Planet M.U.L.E, the economic simulator/strategy game, is now online. Hat tip: Newmark's Door

Pastoralist Rain Insurance

In one of the case studies for my food policy book, Hazell discusses the difficulties of providing insurance for migratory pastoralists in eastern Africa. Among the primary difficulties are that the risk is highly covariate - if it hits one person in an area, it hits them all - making it difficult for private insurers to function without risking going under; and there are serious moral hazard problems involved in public insurance - there's not enough incentive to take precautions to avoid environmental or disease damage, for instance, increasing the cost of the program to the public.

So the idea has been floating around for some time (and in the case study) to set up an insurance scheme not based on livestock deaths, but on rainfall or grass production. ILRI, the International Livestock Research Institute, started up an initiative to do just that in Northern Kenya just a couple weeks ago. Here is their video about it:



Jan de Leeuw, one of ILRI's researchers, was visiting Cornell today, so I got to speak with him a little about it. While it's not his team's project, he mentioned that they are working through a local insurance company with an international re-insurer to protect the local company.

Among the interesting things to study in the months and years ahead during this project that we talked about was understanding whether people who buy the insurance increase the size of their herds (because the downside risk of losing them is lower) or decrease the size of their herds (because they aren't as needed for precautionary savings), and what the non-insured do. If insured people decrease the size of their herds, it might encourage the non-insured to increase the size of theirs, keeping up the potential for tragedies of the commons. We'll keep our fingers crossed.