Many small-scale farmers in the developing world face significant income uncertainty, and rural farmers who live from harvest to harvest don’t have much room for error. Variables beyond the farmers’ control, such as fluctuating crop prices, can make a significant difference in how much a family earns for the year. Farmers may be unwilling to take on additional risks by borrowing and making long-term investments due this uncertainty. This reluctance is thought to contribute to the decision of many farmers not to invest in technologies such as hybrid seeds, fertilizer, or irrigation that could potentially improve crop yields. Many lenders are also extremely wary of extending credit to farmers, fearful that they will inherit the risks inherent to farming. Crop price insurance could help solve this problem, reducing the risk to farmers and providing them with encouragement to make investments in their farms. Lenders, too, may feel more confident in lending to farmers with greater income certainty, facilitating even more capital investments.
Context of the Evaluation:
In Ghana, 50 percent of the rural population lives in poverty. In the Eastern Region where Mumuadu Rural Bank (MRB) operates, an estimated 70 percent of households make a living in the agricultural sector, but agricultural loans make up only 2 percent of the bank’s loan portfolio. Focus groups with maize and eggplant farmers in the area revealed that farmers were hesitant to borrow for fear that fluctuations in crop prices could force them to default. Rainfall fluctuations, typically an important source of risk for farmers, are not a great concern in this part of Ghana. The prices offered for traded crops, however, do fluctuate greatly. Information gathered in baseline surveys suggested that there was a potential but untapped market for crop price insurance: farmers in the area served by MRB expressed that they would be willing to pay to guarantee a certain minimum crop price. Despite this encouraging baseline finding, banks and insurance providers face the challenge that insurance is not a commonly understood concept among farmers in the region.
Details of Intervention:
Researchers developed an agricultural loan product in coordination with MRB that had an insurance component that partially indemnified farmers against low crop prices. Specifically, if crop prices at harvest dropped below a set price floor (the 10th percentile of historical prices for eggplant and the 7th percentile for historical maize prices), the bank would forgive 50 percent of the loan and interest payments. Borrowers were not required to pay any premium for the insurance product. The goal of incorporating insurance into the loan product was to reduce farmers’ risk in borrowing to invest in agriculture inputs. The intervention targeted maize and eggplant farmers in particular because the crops are both commonly grown in the region and subject to volatile (but historically well documented) prices.
Standard Mumuadu procedure is to invite farmers to meet in a group with Mumuadu employees to discuss the bank’s financial services, and to encourage farmers to come to a branch to apply for a loan. The average loan size is approximately US$159, which represents a significant change in cash flow for the borrower. For this project, Mumuadu employees approached community leaders to obtain a list of all maize and eggplant farmers in the village. The same community leaders then invited farmers to attend one of the bank’s information sessions. Farmers on the list were randomly assigned to one of four groups, each of which received a variation on the Mumuadu marketing pitch. The four groups were:
Farmers who were offered the standard Mumuadu loan product;
Farmers who were offered the Mumuadu loan product with complimentary crop price insurance;
Farmers who received financial literacy training, before being offered the standard Mumuadu loan product;
Farmers who received financial literacy training, before being offered the Mumuadu loan product with complimentary crop price insurance.
Prior to the marketing of the loans, Mumuadu employees conducted a survey of the farmers, gathering information relating to their credit history, risk perception, financial management skills, and cognitive ability. An analysis of baseline data, bank administrative data, and a followup survey that focused on farmer investment decisions allowed researchers to draw conclusions on the effect of crop price insurance on borrower behavior and agricultural investment in Ghana.
Take up of loans among farmers was quite high, with 86 percent of farmers in the comparison groups choosing to borrow and 92 percent of farmers in the treatment groups taking out a loan. This high take up across both treatment and control groups made an analysis of the features that predicted take up difficult. In fact, the researchers found no systematic difference across the treatment and control groups when considering which features predicted borrowing. Overall, those who borrowed tended to be older, with higher scores on tests of cognitive ability. They were also more likely to have a record of previous borrowing.
Apart from predictors of borrowing, researchers were interested in whether crop price insurance changed farmers’ investment behavior. There is evidence that it did, but not overwhelmingly. The small sample and high take up across both groups may have played a role in this outcome. Farmers offered the insurance spent 17.9 percentage points more on agricultural chemicals (mostly fertilizer) than those who had not been offered the product. There was also a trend towards growing more eggplants and less maize among these farmers. Farmers offered the insurance were also between 15 and 25 percent more likely to bring their produce to markets rather than sell to brokers who come to pick up the crop. Anecdotally, it is believed that the so-called “farmgate” sellers offer guaranteed purchase contracts, but at lower prices locked in before harvest. Selling in the market, on the other hand, is a potentially more profitable but riskier option.
There are a number of potential reasons why the researchers did not find large effects of the crop price insurance product on either or take up or investment, and further research in necessary to determine their roles. It is uncertain, for example, whether farmers truly understood the benefits of the insurance. Farmers may also have been reluctant to make long term investments changes before an insurance product demonstrates an established presence in the area. Alternatively, crop price uncertainty may not be as important of an indicator of investment decisions as previously thought. Further research, with a larger sample size, is needed to better understand the roles of risk, financial literacy, and product design in determining microinsurance impact.
The addition of health insurance to microcredit products is increasingly popular; but is it sustainable for microfinance institutions? This study complements other IPA research on hospitalization insurance in the Philippines and should provide important policy lessons on providing public services. We partner with Green Bank to evaluate the impact of providing access to the national health insurance program (PhilHealth) among microfinance clients. Anecdotal evidence from Green Bank field staff suggests that illness among clients and their families is one of the biggest causes of delinquency. The PhilHealth program offers an opportunity to reduce clients' vulnerability to unexpected health shocks.
Health shocks, such as illness or injury, have the potential to cause significant financial strain for low income households, possibly contributing to late payment or default among microcredit borrowers. Insurance could protect households from health shocks, but is unavailable to many in developing countries. High transaction costs and information problems complicate efforts to offer health insurance in a cost-effective way. There is also potential for moral hazard: once clients become insured, they may be less inclined to care for their health. Adverse selection may also occur, as clients predisposed to sickness may be those most willing to purchase insurance, dampening the profitability of insurers. But research has failed to produce a consensus on the impact of adverse selection and moral hazard for insurers in the developing world. How will these impact the market for health insurance? And how will health insurance impact the lives of microcredit clients?
Context of the Evaluation:
The majority of residents in the Visayas and Northern Mindanao regions of the Philippines live in small towns and rural villages. A large for-profit bank, The Green Bank of Caraga, has been a strong presence in these regions for the past decade. The majority of microfinance clients they service engage in small-scale sales or work as tailors, drivers of local transport, and operators of bakeshops and roadside eateries. Anecdotal information suggests that health shocks are a leading cause of default and drop-out among their clients. Most of the respondents in this study reported that their ability work or do related productive activities was restricted at least some of the time.
Details of the Intervention:
Researchers worked with the health insurer Philippine Health Insurance Corporation (PhilHealth), which offers the KaSAPI program to help organizations such as microfinance institutions provide affordable health insurance to their members. KaSAPI provided information about the availability and benefits of the insurance to microfinance clients through a marketing campaign. Bank clients were able to use existing savings or loan proceeds to pay for the insurance premium of 300 Philippine Pesos (approximately US$6) per quarter.
Clients were randomly assigned to compulsory insurance, voluntary insurance, or no insurance to serve as a comparison. For clients in the voluntary treatment group, loan officers presented the schedule of PhilHealth benefits and explained that the bank was offering KaSAPI as an optional service for its clients. Premiums were deducted from the loan proceeds. For clients in the compulsory treatment group, loan officers presented PhilHealth materials but also explained that PhilHealth was now a requirement to continue participating in the lending program. Clients’ loans in compulsory PhilHealth treatment group were not released unless they agreed to the premium deduction from their loan proceeds.
End line surveys will establish whether access to health insurance increased risk-taking behavior, if it improved the health status of beneficiaries and if formal insurance crowded out informal insurance arrangements. Evidence will also reveal how health insurance affected institutional outcomes such as profit, client retention, and default.
We partner with Green Bank to assess the demand for hospital insurance among microfinance clients. Green Bank offered the insurance to clients at randomly assigned premiums. By observing the take-up rates at different prices, we can measure the price sensitivity. We also collect an extensive data on demographics and risk characteristics of the individuals in the sample, which allows for an examination of adverse selection in the insurance market (risky individuals are less price sensitive than risk-adverse individuals).
The impact of information asymmetries on insurance markets is important in theory but ambiguous in practice. Generations of studies have failed to produce a consensus on the presence, absence, or magnitude of adverse selection and moral hazard in most markets. While an increasing number of microfinance institutions offer insurance products to their clients as an add-on, there are few empirical studies on the impact of expanding access to health or hospitalization insurance in developing country contexts.
The sample of our study includes 2,036 existing clients under the Green Bank's individual-lending program (TREES) in 10 branches of Northern Mindanao and Caraga regions.
Farmers in sub-Saharan Africa, especially those in the Sahel region, face a wide range risks to their welfare and livelihoods, such as drought, price fluctuations and family illness. In this study in Burkina Faso and Senegal, researchers evaluate the impact of weather insurance and three savings devices on a variety of investment and welfare outcomes, and assess which products are most effective at enabling individuals to manage risk.
Farmers in many developing countries are subject to a multitude of hazards, from droughts, to price dips, to illness. In West Africa, for example, almost every rural household manages farmland and is exposed to the risk of unpredictable rainfall.Research indicates that poor, rural households are unable to fully insure against such shocks, and that an inability to manage risks have long-run welfare implications. While there is a fast-growing policy interest in offering financial products to help rural households manage risk, the evidence is still scant as to which products are the most effective.
A combination of financial products may allow households to best manage multiple shocks. After all, while weather insurance may help rural households manage the impact of widespread drought, it will not help a farmer manage losses localized to his fields. Similiarly, improved access to savings accounts may allow households to quickly respond to unexpected illness, but it will have little value in helping households manage large or repeated shocks, like drought.
This study contributes to a fast-growing body of research on the demand for, and impact of, financial instruments that help households manage risk.
Context of the Evaluation:
The Sahel, the belt of land that lies along the southern edge of the Sahara desert, is one of the poorest and most vulnerable regions in the world. With low rainfall, frequent droughts, floods, and now, desertification, the region is a very a difficult and risky place to farm. Yet agriculture is the main source of livelihood for the majority of people in the Sahelien countries of Burkina Faso, Chad, Mali, Mauritania, Niger and Senegal. Not surprisingly, farming families in this region are prone to food insecurity and malnutrition. Most participants in this study cultivated less than six hectares of land.
Details of the Intervention:
To evaluate the impact of four different financial products on households, and compare the effectiveness of weather insurance and savings devices in achieving welfare gains, researchers carried out a randomized evaluation with approximately 1,000 individuals in rural areas of Senegal and Burkina, specifically in the Department de Kaffrine (Senegal) and around Bobo-Dioulasso (Burkina Faso).
This evaluation was conducted with 14 rotating savings and credit associations (ROSCAs) and 17 farmers’ groups. ROSCAS had to hold regular meetings in order to be included in the sample. ROSCAS in both countries were composed entirely of women, while farmers groups were entirely male in Senegal, and mixed in Burkina Faso.
The study design resembled an experimental game, in that the activities simulated real life choices—in this case, selecting financial products. The study design was not game-like in that the financial products used during the game were real, and they were paid out as real financial products would be.
Twenty participants at a time were invited experimental sessions. At the sessions, participants were provided with a 6,000 CFA (about $12). After an information session, participants were randomly allocated to one of four groups, through a public lottery. In each randomly composed group, one of the four financial products was described and then offered to participants. Participants were asked to decide how much of their 6,000 CFA they wanted to take as cash and how much they wanted to put into the product that they had been offered.
The four financial products offered were as follows:
1) Insurance: An index insurance product providing protection against too little rainfall for the main crop in the area (groundnuts in Senegal, maize in Burkina Faso). In both countries the index-insurance product was a product that was being sold by local insurance companies with the support of Planet Guarantee.
2) Agricultural investment savings at home: Saving for agricultural input purchases at the input fair. Savings were earmarked through placing them in an envelope which was then sealed and stamped with the purpose of the savings stated on the front. The envelope would be kept at home by the participant and there was nothing, other than the earmarking, that prevented them from using the savings for other purposes.
3) Agricultural investment savings with the group treasurer: Saving for agricultural input purchases at the fair. However in this treatment savings were not kept at home by the participant, but rather they were managed by the treasurer of the ROSCA or farmers group to which the participant belonged. To withdraw from the savings, the participant would have to go through the treasurer. To withdraw money the participant would have to take their savings passbook to the treasurer and the treasurer will record the data, amount withdrawn and purpose and both participant and the treasurer sign it. The treasurer of the group was encouraged not to give out the money before input day. Interest on savings was paid if the full amount deposited was still with the treasurer on the day of the input fair. The interest rate was varied across experimental sessions.
4) Emergency savings with the group treasurer: Saving for emergency expenses. Again, in this treatment savings were managed by the treasurer of the ROSCA or farmers group to which the participant belonged. To withdraw from the savings, the participant would have to go through the treasurer. To withdraw money the participant would have to take their savings passbook to the treasurer and the treasurer will record the data, amount withdrawn and purpose and both participant and the treasurer sign it. The treasurer of the group was encouraged not to give out the money unless the participant needs money for an emergency. Interest on savings was paid if the full amount deposited was still with the treasurer on the day of the input fair. The interest rate was varied across experimental sessions.
One month after the original experimental session, participants attended fairs where they were given the option of purchasing inputs. Participants in treatments 3 and 4 were provided with the remaining money that had been in savings with the group treasurer, and any interest that was due was paid. Participants in treatment 4 (savings for emergencies) were also offered the opportunity to save again with the group treasurer for further safe keeping over a three-month period at the same interest rate as they had been offered earlier.
The above study design enabled researchers to examine the following: the effectiveness of insurance versus targeted savings in encouraging productive investment and improving welfare; the effectiveness of insurance versus savings in managing risk and encouraging investments in risky agricultural production; the difference between saving for emergencies and saving for investment in affecting ability to manage risk and investment outcomes; the role of commitment in savings products in ensuring outcomes; gender differences in take-up and impact of these financial devices. Outcomes were measured one month and six months after offering the financial devices (during the growing season and after harvest).
Results and Policy Lessons:
 Karlan, Dean, Isaac Osei-Akoto, Robert Osei, and Chris Udry. "Examining underinvestment in agriculture: Measuring returns to capital and insurance." à paraître (2011).
Townsend, R.M. 1994. Risk and Insurance in Village India." Econometrica: Journal of the Econometric Society, 62(3): 539-591.
Dercon, Stefan. "Growth and shocks: evidence from rural Ethiopia." Journal of Development Economics 74, no. 2 (2004): 309-329.
 World Bank. “Transforming Agriculture in the Sahel.” Available at: http://www.worldbank.org/content/dam/Worldbank/document/Africa/transforming-agriculture-in-the-sahel-background-note-english.pdf
Government-subsidized health care is seen as a useful tool in tackling the health challenges in sub-Saharan Africa, but for it to work, people have to enroll in the program. Ghana offers universal health care, but only about a third of the population is enrolled. Some evidence suggested education about the insurance program would boost enrollment. However, a randomized evaluation in northern Ghana determined that education was not the barrier.
Health outcomes in sub-Saharan Africa are on average very poor. While the region has 11 percent of the world’s population, it accounts for half of the deaths of children under five, has the highest maternal mortality rate and is disproportionately impacted by HIV/AIDS, tuberculosis, and malaria.Many people, especially in rural areas, lack access to basic health care services. To help tackle the problem, some governments are providing low-cost public insurance options. However, getting the population enrolled in such programs has been a challenge in some countries. One theory was that low enrollment was a result of lack of knowledge and understanding of health insurance, and that health insurance education would lead to higher enrollment rates.
Context of the Evaluation:
Although Ghana's National Health Insurance Scheme has offered low-cost insurance since 2003, a large share of the population remains uncovered. As of 2010, the National Health Insurance Authority estimated that only 34 percent of the population was actively enrolled in health insurance. Coverage rates are especially low in rural areas, including Ghana's Northern Region.
Preliminary qualitative research from international development organization Freedom From Hunger suggested that one reason for low enrollment was lack of knowledge and understanding of health insurance. Freedom From Hunger and IPA partnered to evaluate the impact of an education program developed by Freedom From Hunger on enrollment rates. Freedom From Hunger and IPA then partnered with a local microfinance institution Sinapi Aba Trust to administer the health insurance education program to Sinapi Aba Trust’s clients in both urban and rural areas in the Northern Region, Ghana, specifically in Bole, Salaga, Tamale, and Walewale.
Details of the Intervention:
To understand if health insurance education leads to higher enrollment rates, researchers carried out a randomized evaluation with survey data from 1,500 Sinapi Aba Trust microfinance group clients. Credit officers with Sinapi Aba Trust administered the education program to microfinance groups after being trained by Freedom From Hunger.
Short session education: These credit groups received education through a series of six 30-minute sessions over 12 weeks.
Short session education and reminder session: These credit groups were also given education through a series of six 30-minute sessions over 12 weeks, but with a session one year later that reviewed the material and reminded clients that to continue to have access to health insurance, they needed to enroll each year.
Consolidated session education: These credit groups covered the same material as the “short session” groups but in one 2-hour session.
Consolidated session education and reminder session:These credit groups covered the same material as the “short session” groups but in one 2-hour session, and with a reminder session one year later.
A fifth, comparison group did not receive any education program.
IPA conducted baseline, midline, and endline surveys with 1,500 respondents. Within each client group, five individuals were randomly selected to be included in the study data. Sinapi Aba Trust credit officers administered post-education knowledge tests with a small subset of the sample. IPA also conducted a qualitative endline survey with a small a subset of the sample.
Results and Policy Lessons:
Results indicated that individuals who received health insurance education were no more likely to enroll in health insurance than individuals in the control group.
While education may have had some impact on knowledge of insurance, the effect was short-lived. Notably, attitudes towards insurance were universally favorable, and knowledge of insurance generally high, regardless of treatment status. This suggests that knowledge was not a major barrier to health insurance enrollment in Ghana. Follow-up interviews suggest that the convenience of registration, clients following through on stated intent to enroll, and the timing of making the premium payments are more common challenges for enrollment. In environments where knowledge and enrollment are low, educational programs may, therefore, have more impact.
Enrollment increased for all of the studied groups, including the comparison group that received no treatment, at a higher rate than the general population. It is possible that the repeated surveys, along with the treatment activities, might have served as “touch points” that prompted clients to take action to register or enroll in insurance.
In sum, this study joins a growing body of evidence finding that in many contexts, the impact of education programs on health insurance enrollment is limited, especially where a program is established and generally well-known. This research suggests that efforts to promote enrollment should focus on other barriers to enrollment, such as convenience, timing of costs, and following through with intent to enroll.
Risk, rather than a lack of capital, appears to drive underinvestment in agriculture in Northern Ghana - when farmers were provided with weather insurance they spent more on inputs such as chemicals, land preparation, and labor.
Underinvestment in agricultural inputs such as fertilizer, hybrid seeds, or labor is thought to drive low crop yields in Africa and other parts of the developing world. Several factors may help explain why farmers fail to invest in such potentially profitable inputs. It is possible that they are wary of the riskiness of adopting new agricultural methods or tools—if they invest and their crops still fail, they will have even less money than if they had not invested at all. Farmers may also lack the capital necessary to purchase these inputs, and be unable to obtain credit to finance investment in their farms. Because the returns to using new technologies can be so high, encouraging use among farmers has the potential to greatly improve their welfare, but financial institutions and policymakers need to first understand what factors are truly driving underinvestment in agriculture.
The climate of northern Ghana’s savannah region has a single short wet season, with high annual variation in rainfall. This kind of weather pattern creates great risk for farmers who depend on the weather for their livelihood, particularly when agriculture is primarily rain-fed, as it is in this area. There is strong evidence that shocks in the amount of rainfall translate directly into consumption fluctuations for farmers, and so investment in new agricultural technologies or methods has the potential to significantly affect welfare. Throughout Ghana, the average farmer uses only 7.4 kg of fertilizer per hectare, while in South Asia fertilizer use averages more than 100 kg per hectare. Initial surveys in northern Ghana revealed that the median farmer participating in this study did not use any chemical inputs on their crops, often citing lack of money or concerns regarding weather risk as key obstacles preventing investment.
Description of the Intervention:
In the first year of the study, researchers tested the relative importance of capital and risk in driving farmers’ investment behavior. From a total of 502 households, 117 were randomly selected to receive a cash grant to fund agricultural inputs; these farmers received GHC 60 (approximately US$45) per acre for up to 15 acres, delivered at a time of their choosing. Another 135 randomly selected households received a grant for an insurance scheme that paid roughly GHC 100 (US$75) per acre of maize if rainfall at a local weather station went above or below specified thresholds. Ninety-five households received both the cash grant and the insurance grant, while 155 households received no additional services and formed the comparison group.
In the second year, researchers tested different prices for rainfall insurance among the original sample households, plus households in an additional twelve communities. Households were visited up to four times by marketers: during the first visit they were informed about the product, during the second visit they were asked to sign the contract and pay premiums, during the third visit the marketer issued a policyholder certificate, and during a fourth visit an auditor verified their understanding of the product. The price that people were offered for insurance was randomly assigned at the community level: households in the original sample would be offered rainfall insurance at a cost of either 1 GHC or 4 GHC (approximately US$0.75 or US$3), while in the newly added communities, households would be offered insurance at either the market price of GHC 12-14, or the actuarially fair price of GHC 8-9.5.
In year three, the pricing experiment continued in collaboration with the Ghana Agricultural Insurance Programme (GAIP), to market their drought-indexed insurance. Because this product was more complex, scripts used at the four marketing visits were updated to make it more understandable. Pricing of the insurance was again randomized at the community level, with 23 communities receiving the market price, 23 communities receiving the actuarially fair price, and 26 communities receiving a subsidized price.
Importance of Capital vs. Risk: Results from the first year suggest that risk, rather than capital, was the major constraint on investment among farmers in this sample. Farmers who received the insurance grant increased their expenditure on farm chemicals, and also brought more acres of land under cultivation. If the primary constraint on investment was a lack of capital, then the insurance product, which offered no up-front payouts, would not have affected their ability to purchase materials. Many farmers appeared to recognize the value of the insurance product, with a significant proportion choosing to purchase insurance in years two and three. Take-up of the insurance product did not change when a token price of GHC 1 per acre was charged, and even at the actuarially fair price of almost GHC 10 per acre, 40-50 percent of farmers purchased insurance.
Impacts of Weather Insurance: Farmers with weather insurance invested more in agricultural inputs, particularly in chemicals, land preparation, and hired labor. Total cultivation expenditures were more than GHC 250 (US$188) higher for farmers with insurance, representing a 33 percent increase relative to the comparison group. These impacts were even larger among farmers who received both insurance and a capital grant. Despite the increases in production, it is not clear that investments were actually profitable for farmers: the additional expenditures may have increased by more than the value of the additional output, depending on how household labor is valued.
Trustworthiness of Insurance: Results suggest that how much farmers trust the insurance scheme has a large impact on their take-up and response to rainfall insurance. Take-up of insurance was considerably higher among farmers who also received a capital grant, but it was not higher among households who were wealthier. This suggests that farmers might not have been entirely confident that the promised insurance payouts would be made when trigger events occurred, and so they were more willing to take the risk of purchasing when they had been given extra cash. Similarly, individuals who were familiar with others who had received insurance payouts in previous years were significantly more likely to take-up insurance themselves.