The Performance of Index Based Livestock Insurance: Ex Ante Assessment in the Presence of a Poverty Trap

46 Pages Posted: 18 May 2011 Last revised: 1 Sep 2014

See all articles by Sommarat Chantarat

Sommarat Chantarat

Australian National University - Crawford School of Economics and Government

Andrew G. Mude

Cornell University - Department of Economics

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Calum G. Turvey

Cornell University - School of Applied Economics and Management

Date Written: November 1, 2009

Abstract

This paper evaluates the effectiveness of a new index-based livestock insurance (IBLI) product designed to compensate for area average predicted livestock mortality loss in northern Kenya, where previous work has established the presence of poverty traps. We simulate household-specific wealth dynamics based on a model parameterized using rich panel and experimental data from the region. The simulations allow us to investigate patterns of willingness to pay for asset index insurance that is imperfectly correlated with individuals' loss experience. The bifurcated livestock dynamics associated with the poverty trap gives rise to insurance valuation that is highly nonlinear in individual herd size. Willingness to pay among vulnerable groups who most need insurance are, on average, lower than commercially viable rates but subsidization of IBLI premiums appears to offer more cost-effective poverty reduction than direct transfers to the poor.

Keywords: Index insurance, asset risk, bifurcated wealth dynamics, nonlinear growth, poverty traps, safety net, risk preference elicitation, pastoralists, Kenya

Suggested Citation

Chantarat, Sommarat and Mude, Andrew G. and Barrett, Christopher B. and Turvey, Calum G., The Performance of Index Based Livestock Insurance: Ex Ante Assessment in the Presence of a Poverty Trap (November 1, 2009). Available at SSRN: https://ssrn.com/abstract=1844751 or http://dx.doi.org/10.2139/ssrn.1844751

Sommarat Chantarat

Australian National University - Crawford School of Economics and Government ( email )

7107 Coombs Building
Canberra, ACT 0200
Australia
612 6125 3756 (Phone)
612 6125 3700 (Fax)

HOME PAGE: http://www.schantarat.com

Andrew G. Mude

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Christopher B. Barrett (Contact Author)

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

315 Warren Hall
Ithaca, NY 14853-7801
United States
607-255-4489 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://aem.cornell.edu/faculty_sites/cbb2/

Calum G. Turvey

Cornell University - School of Applied Economics and Management ( email )

248 Warren Hall
Ithaca, NY 14853
United States

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