Bundling Weather Index-Based Crop Insurance and Credit: A Cautionary Tale Against Misunderstood and Misinformed Take-Up

Abstract

The initial purpose of this study was to evaluate the effect of different bundling options of weather index-based crop insurance with agricultural credit on levels of insurance take-up. In a randomised controlled trial, 371 loan applicants were offered credit-linked insurance in three different ways: (1) mandatory bundling of products and incentivising insurance take-up by making it a partial supplement to loan collateral, (2) voluntary insurance with the same incentive and (3) voluntary insurance without incentive. However, we will quickly realize that the take-up of the bundle is mostly related to an issue of understanding, level of knowledge or information interpretation rather than to the way of bundling. Though the level of take-up appeared to be high, no matter the bundling option, results revealed that it was a misunderstood take-up based on the insufficient level of information or inappropriate interpretation of it. More effort is hence needed from development stakeholders to make sure the product value of insurance, namely a risk transfer instrument, is fully grabbed by farmers who purchase it.

Keywords: crop insurance; credit; bundle; understanding; information; uptake decision, RCT

JEL Classification: D81, G20, O16, C93