CL IMATE CHANGE , & WOMEN’S ASSETS COLLECTIVE ACTION, IFPRI Eight Agricultural Development Interventions in Africa and South Asia POLICY NOTE Microinsurance Decisions Gendered Evidence from Rural Bangladesh Neha Kumar and Daniel Clarke IN RECENT YEARS, THERE HAS BEEN GROWING INTEREST IN THE ROLE INDEX-BASED INSURANCE CAN PLAY IN increasing the capacity of the rural poor to reduce agricultural risks as they cope with long-term changes in tem- perature and precipitation and growing climate variability. Index-based insurance relies on an independently observ- able index that is correlated with losses incurred as a result of a specific calamity. For example, rainfall index insurance pays out when the rainfall is below a threshold level at a rainfall measuring station in the vicinity of the farmer in question; such insur- ance is not based on the loss incurred by the farmer. Such insurance is based on the assumption that farm output is correlated with the amount of rainfall the farm receives, which in turn is correlated with the amount of rainfall at the weather station. Most index-based insurance products have been developed without explicit attention to gender. Yet there is ample evi- dence that shocks affect men and women differently (see companion note by Quisumbing, Kumar, and Behrman). There is also substantial literature that shows that men and women allocate resources in different ways, with women spending more on schooling and food. Other considerations with regard to gendered differences, such as whether men and women cope differently with various shocks, might also be useful to take into account when developing index-based insurance products (see companion notes by Quisumbing, Kumar, and Behrman; and by Rakib and Matz). This brief looks at the role index-based insurance can play in Bangladesh. Farmers in rural Bangladesh face a multi- tude of risks, ranging from extreme weather events to crop disease and pests, to health shocks, and like all rural poor they are particularly vulnerable to the adverse effects of cli- mate change. Yet insurance markets have hitherto failed to develop in the country, despite an evident need for insurance products. The increasing participation of women in the agricultural sector in Bangladesh reinforces the need to consider the role of gender in decisions to purchase agricultural insurance. Data from the Bangladesh Bureau of Statistics for the years 1999–2000 and 2005–2006 shows an absolute decrease of 6 percent in male labor participation in agriculture while the number of females employed in agricultural activities has increased from 3.76 to 7.71 million—that is, by more than 100 percent. As a result of such changes, the proportion of women in the agricultural labor force has increased from less than 20 percent to 34 percent of the total. This brief summarizes an in-depth study on gendered aspects of willingness to pay for index-based agricultural insurance in Bangladesh. EXPERIMENTAL DESIGN AND SAMPLE The experiment included (1) a benchmark decision problem of a choice of six lotteries involving varying levels of risk and (2) insurance purchase decisions presented to be as similar as possible to real-world decisions. Participants were presented with a contract for catastrophic insurance (a low-probability event) and a contract for moderate insurance (a high prob- ability event) and were asked to choose how much (if any) of each type of insurance they wanted to buy at a given price. The price of insurance was varied across 60 sessions, each of which had 15 participants. The study included a total of 900 participants across 20 villages. A short questionnaire collected information on each partici- pant’s demographic characteristics, risk preferences, knowl- edge of insurance products, and asset ownership, as well 57 Pa no s/ G . M . B . A ka sh as the agricultural risks the participants face. The average respondent is 39 years old and had completed 4 years of schooling. An equal number of men and women make up the sample participating in the experiment sessions. Follow- ing the gender distribution in the sample, about half of the participants are self-employed in agriculture while the other half are involved primarily in housework and childcare. About half of the participants are household heads, and 89 percent of the participants come from male-headed households, reflecting the average proportion of male-headed house- holds in Bangladesh at large. The average household has 5 members and a land holding of about 100 decimals (equiva- lent to 1 acre). Most participants grow paddy in the rain-fed Aman as well as the dry Boro season. Pests were identified as a major source of risk by 37 percent of the participants. Deficient rain in the Aman season was identified as a major source of risk by 17 percent, excess rain by 14 percent, and flooding by 12 percent. Other risk factors noted by a small fraction of the participants were deficient irrigation water in the dry season, risk of crop diseases, untimely rain, and hail storms. Although 12 and 16 percent of the respondents indicated that either they or someone in their household, respectively, had bought life insurance, no one in the sample had bought any other kind of insurance product. Three-quarters of the respondents were aware that they could not purchase insur- ance against a bad event after the event occurred, and more than half knew that a premium would not be returned to them if the event insured against did not occur. The majority said that they would be able to borrow money in case of an emergency. A small fraction of the respondents have bank accounts. Eighty-five percent of the respondents have cash savings, with an average value of 20,000 taka (equivalent to US$274). For the benchmark decision problem of choosing lotteries the study found men to be more risk-averse than women, a result that is contrary to existing literature on gender differences in risk preference. However, when the participants were asked, as part of the questionnaire, to choose agricultural transac- tions with varying levels of risk, women were more risk-averse than men. RESULTS AND COMMENTS During the experiment, on average, 97 percent of the partici- pants decided to buy insurance, with no significant difference between men and women. A small decrease in take-up of insurance for a catastrophic (low-probability) event is driven by the women in the sample. Among women, those who were older and those having a bank account were slightly more likely to purchase insurance. Men are more likely than women to buy more units of insurance. Wealth as captured by the total land owned had no apparent effect on the total number of units bought, but wealthier women bought more units at a decreasing rate. Individuals who were more risk-averse bought fewer units of insurance, a relationship that became stronger at higher levels of risk aversion, potentially because the payout is tied to the index rather than the loss incurred. When insurance was offered at a marked-up (actuarially unfair) price, participants purchased fewer units, except for the case of the catastrophic event. It is possible that the participants associated the high price of the catastrophic event insurance with quality. Turning to the question of how respondent and household characteristics differ across the various insurance products, one interesting gender distinction is that women bought more when the insurance was offered at the marked-up price, whereas men bought less. The ability to borrow 1000 taka for an emergency within a week is positively correlated with the amount of insurance bought for the high-probability event (more so among the men). Respondents may be regarding insurance as a substitute for borrowing from peers in the event of an emergency. When offered insurance for the low-probability event, women bought more units at the higher (actuarially unfair) price. It was unclear whether they inferred quality from the high price or lacked understanding of how the product worked. Among the participants who were only offered the cheaper (actuari- ally fair) insurance, the more land men had the fewer units of insurance they purchased, but the reverse was true for women. When offered the more expensive (actuarially unfair) insurance product, men bought 0.48 units more, on average. Participants with more land and those who were able to bor- row in emergencies bought more units. Women with a higher 58 TABLE 1 Gender-differentiated descriptive statistics, 2009 and 2012 growing seasons Effect on number of insurance units bought Characteristics of the insurance product Men Women Offered for a catastrophic event (low probability) • Positive effect of years of schooling • Negative effect of risk aversion • Negative effect if offered at expensive price • Positive effect of ability to borrow emergency funds • Positive effect if offered at expensive price Offered for a bad event (high probability) • Negative effect of total land owned • Positive effect of holding a bank account • Negative effect of risk aversion • Negative effect if offered at expensive price • Negative effect of holding a bank account • Negative effect if offered at expensive price Offered at an expensive/actuarially unfair price • Positive effect of ability to borrow emergency funds • Negative effect of risk aversion • Positive effect if offered for catastrophic event • Positive effect of ability to borrow emergency funds • Negative effect of financial literacy score • Positive effect if offered for catastrophic event Offered at a cheap/actuarially fair price • Negative effect of total land owned • Negative effect of risk aversion • Positive effect of total land owned • Negative effect of risk aversion • Negative effect if offered for catastrophic event Source: Compiled by authors. financial literacy score bought a lower number of units (see Table 1 for how different characteristics affected men and women’s uptake of different insurance products). POLICY IMPLICATIONS This study examined demand for agricultural index insur- ance products in rural Bangladesh, recognizing that insurance products have the potential to serve as an adaptation strategy to reduce adverse climate risks for farm households. The find- ings of this study suggest that there is significant demand and illuminated important gender differences to be taken into account in developing successful index-based insurance prod- ucts for the rural Bangladesh market. Women value insuring against agricultural risk faced by the household even though they are less involved in agricultural decisionmaking than men. Insurance companies or other microfinance institutions marketing an insurance product should take into account that women are just as likely as men to purchase agricultural insurance. However, for women, understanding of the insurance product and financial literacy are important factors in their uptake of insurance. On aver- age, women have less education and lower financial literacy than men do, as well as less background in understanding agricultural risk. Because these factors place women at a disadvantage when facing an insurance purchase decision, insurance marketing efforts that include extensive training/ information sessions will be more effective. It is important, however, to keep in mind that the study areas, two districts in rural Bangladesh with smallholder and tenant farmers, do not represent all the agroecological zones of the country. Therefore, the findings are specific to this context and can be extrapolated only to scenarios that are similar. Also, it should be noted that the fact that these studies were about agricultural insurance gave the topic salience among the participants. Finally, even though the product offered in the experiment was designed to be as close as possible to a real-world insurance product, it was provided in a lab setting in which time was devoted to explaining the product and confirming understanding. Therefore, insurance companies or microfinance institutions offering insurance products should consider the relative demand for insurance products but avoid generalizing these findings to an absolute demand. 59 60 INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE A world free of hunger and malnutrition 2033 K Street, NW, Washington, DC 20006-1002 USA | T. +1.202.862.5600 | F. +1.202.467.4439 | Skype: IFPRIhomeoffice | ifpri@cgiar.org | www.ifpri.org This publication has been prepared as an output of the project Enhancing Women’s Assets to Manage Risk under Climate Change: Potential for Group-Based Approaches. It has not been peer reviewed. Any opinions stated herein are those of the author(s) and are not necessarily representative of or endorsed by the International Food Policy Research Institute. Copyright © 2014 International Food Policy Research Institute. All rights reserved. For permission to reproduce, contact ifpri-copyright@cgiar.org. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE A world free of hunger and malnutrition 2033 K Street, NW, Washington, DC 20006-1002 USA | T. +1.202.862.5600 | F. +1.202.467.4439 | Skype: IFPRIhomeoffice | ifpri@cgiar.org | www.ifpri.org This publication has been prepared as an output of the project Enhancing Women’s Assets to Manage Risk under Climate Change: Potential for Group-Based Approaches. It has not been peer reviewed. Any opinions stated herein are those of the author(s) and are not necessarily representative of or endorsed by the International Food Policy Research Institute. Copyright © 2014 International Food Policy Research Institute. All rights reserved. For permission to reproduce, contact ifpri-copyright@cgiar.org. The project is supported by the Federal Ministry for Economic Cooperation and Development, Germany, and is undertaken as part of the CGIAR Research Program on Policies, Institutions, and Markets (PIM). FOR FURTHER READING Clarke, D., and N. Kumar. Forthcoming. Microinsurance Decisions: Gendered Evidence from Rural Bangladesh. IFPRI Discussion Paper. Washington, DC: International Food Policy Research Institute. Clarke, D., N. Das, F. de Nicola, R.V. Hill, N. Kumar, and P. Mehta. 2012. The Value of Customized Insurance for Farmers in Rural Bangladesh. IFPRI Discussion Paper 1202. Washing- ton, DC: International Food Policy Research Institute. Neha Kumar (n.kumar@cgiar.org) is a research fellow in the Poverty, Health, and Nutrition Division of the International Food Policy Research Insti- tute (IFPRI), Washington, DC. Daniel Clarke (dclarke2@worldbank.org) is a senior disaster risk financing and insurance specialist at the World Bank, Washington, DC. http://www.ifpri.org mailto:ifpri-copyright%40cgiar.org?subject=