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How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya

57 Pages Posted: 3 Aug 2014 Last revised: 5 Jan 2018

Nathaniel Duane Jensen

Cornell University - Dyson School of Applied Economics and Management; International Livestock Research Institute (ILRI)

Andrew Mude

CGIAR - International Livestock Research Institute (ILRI)

Christopher B. Barrett

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

Date Written: November 28, 2017

Abstract

Weather-related shocks are a major threat to the health and livelihoods of vulnerable farmers and herders in low-income, arid, and semi-arid regions of the world. Index insurance represents a promising tool for mitigating the impacts of such risk but in practice has exhibited low uptake rates by potential clients. Basis risk—the remaining risk faced by an insured individual—is widely acknowledged as the Achilles heel of index insurance, and yet direct measurements of basis risk have never been used to study its role in determining demand for index insurance. Further, client knowledge of season-specific environmental information and spatial variation in basis risk introduces the possibility of adverse selection, a feature often presumed to be absent for index products. We used longitudinal household data to determine which factors affected demand for index based livestock insurance (IBLI). While both price and the non-price factors studied previously are indeed important, our findings indicate that basis risk and spatiotemporal adverse selection also play a major role in determining demand for IBLI.

Keywords: Pastoralists, Uninsured Risk, Livestock, Adverse Selection, Basis Risk

JEL Classification: D81, O16, Q12

Suggested Citation

Jensen, Nathaniel Duane and Mude, Andrew and Barrett, Christopher B., How Basis Risk and Spatiotemporal Adverse Selection Influence Demand for Index Insurance: Evidence from Northern Kenya (November 28, 2017). Available at SSRN: https://ssrn.com/abstract=2475187 or http://dx.doi.org/10.2139/ssrn.2475187

Nathaniel Duane Jensen (Contact Author)

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

Ithaca, NY
United States

International Livestock Research Institute (ILRI) ( email )

P.O. Box 30709
Nairobi 00100
Kenya

Andrew Mude

CGIAR - International Livestock Research Institute (ILRI) ( email )

P.O. Box 5689
Ababa
Kenya

Christopher B. Barrett

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/

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