Microinsurance forwarded as an option to help the poor. Good article by a serious economist!Source: Le Panoptique, by João Sarmento Cunha
Moving into the XXI century, images of lives devastated by floods in Asia, droughts in Africa and cyclones in Central America are becoming increasingly familiar, reminding us of how vulnerable people in developing countries are to climate change. Considering the hardships these people face every time a catastrophe dawns on them, could they not perhaps be insured against the perils of climate?
Recent headlines of devastation caused by Cyclone Sidr in Bangladesh, displacing over half a million people, or the massive floods in southern Mexico, leaving vast stretches of land completely submerged, are just the visible face of a growing problem affecting developing countries. According to a recent Oxfam report1, the number of weather related disasters has quadrupled over the past 20 years, with an average of 500 disasters taking place each year compared to 120 in the 1980s. Vulnerability to adverse weather events occurs for several reasons, among them the geographic location, poor infra-structure, economies highly dependent on agriculture, high incidence of poverty and limited means of coping with risk, including access to formal insurance. Climate change is expected to make matters worse, raising the likelihood of more extreme events like the ones mentioned above and posing real risks to development2. So, considering that many instruments already exist for risk-sharing and transfer, can these also be provided to the poor in rural areas of developing countries? Can the poor be insured against adverse weather events and climate change more broadly?
Risks, vulnerability and poverty
The rural poor own very few assets and income generation is largely dependent on labour put into agricultural activities. The main threats to livelihoods are therefore those pertaining to loss of life, critical illness, old age, lower agricultural productivity and loss of assets. To counter these risks, and considering that formal protection mechanisms such as social security and formal insurance are wholly absent, these people have developed sophisticated strategies to “insure” against negative surprises. Ex ante, they may diversify their sources of income and make more conservative decisions on farm technologies and techniques. Although less risky, these forms of income smoothing tend to yield low returns and contribute to the vicious circle of poverty.
They may also resort to risk coping strategies following a shock, such as drawing down their savings or through mutual assistance arrangements. The downside is that these strategies are often insufficient in dealing with shocks that affect whole regions (i.e. covariate shocks). This is especially true if the savings are held in cattle or grain, and thus perishable, and if the social networks are based on close relatives and neighbours which may be equally affected by the shock. There is also significant evidence that when severe economy-wide shocks occur, certain survival strategies are used that divert spending away from investments in education and health, with serious implications on the well-being of future generations3-4. Transitory events can therefore have permanent effects on household welfare5.
For more see here.
Recent headlines of devastation caused by Cyclone Sidr in Bangladesh, displacing over half a million people, or the massive floods in southern Mexico, leaving vast stretches of land completely submerged, are just the visible face of a growing problem affecting developing countries. According to a recent Oxfam report1, the number of weather related disasters has quadrupled over the past 20 years, with an average of 500 disasters taking place each year compared to 120 in the 1980s. Vulnerability to adverse weather events occurs for several reasons, among them the geographic location, poor infra-structure, economies highly dependent on agriculture, high incidence of poverty and limited means of coping with risk, including access to formal insurance. Climate change is expected to make matters worse, raising the likelihood of more extreme events like the ones mentioned above and posing real risks to development2. So, considering that many instruments already exist for risk-sharing and transfer, can these also be provided to the poor in rural areas of developing countries? Can the poor be insured against adverse weather events and climate change more broadly?
Risks, vulnerability and poverty
The rural poor own very few assets and income generation is largely dependent on labour put into agricultural activities. The main threats to livelihoods are therefore those pertaining to loss of life, critical illness, old age, lower agricultural productivity and loss of assets. To counter these risks, and considering that formal protection mechanisms such as social security and formal insurance are wholly absent, these people have developed sophisticated strategies to “insure” against negative surprises. Ex ante, they may diversify their sources of income and make more conservative decisions on farm technologies and techniques. Although less risky, these forms of income smoothing tend to yield low returns and contribute to the vicious circle of poverty.
They may also resort to risk coping strategies following a shock, such as drawing down their savings or through mutual assistance arrangements. The downside is that these strategies are often insufficient in dealing with shocks that affect whole regions (i.e. covariate shocks). This is especially true if the savings are held in cattle or grain, and thus perishable, and if the social networks are based on close relatives and neighbours which may be equally affected by the shock. There is also significant evidence that when severe economy-wide shocks occur, certain survival strategies are used that divert spending away from investments in education and health, with serious implications on the well-being of future generations3-4. Transitory events can therefore have permanent effects on household welfare5.
For more see here.
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