Risk, Poverty, and Insurance
This paper analyzes the impact of risk on poverty alleviation, and examines the potential of groups to offer insurance products.
Evidence from around the world indicates that risk induces farmers to grow low-risk, low-return crops. Climate and other shocks undermine long-term nutrition, educational achievements and earnings. While insurance is not a substitute for income-generating initiatives, it can help prevent a worsening of poverty and encourage more risk-taking behaviour. Advantages of working with groups to offer insurance produces include:
- Reduction in monitoring and other information costs;
- Devolved targeting to the level of the groups by choosing those that comprise members from the poorer sections of society;
- Benefit from mutual support systems in existing groups, which makes it easy to build on existing informal schemes with complementary activities;
- Reduction in the information or trust gap between formal insurance providers and poor clients.
Designing insurance products is relatively easy, but their uptake is likely to be low at first. Building on existing mutual support, institutions may offer a cost-effective, group-based mechanism to spread insurance targeted at the poor.