IDEAS home Printed from https://ideas.repec.org/a/pal/genrir/v47y2022i1d10.1057_s10713-020-00060-1.html
   My bibliography  Save this article

Literacy and the quality of index insurance decisions

Author

Listed:
  • Glenn Harrison

    (Georgia State University
    University of Cape Town)

  • Karlijn Morsink

    (Utrecht University)

  • Mark Schneider

    (Georgia State University)

Abstract

There is widespread concern in developing countries with the expansion of formal insurance products to help manage significant risks. These concerns arise primarily from a lack of understanding of insurance products, general failures of financial literacy and the need to use relatively exotic products in order to keep costs down for poor households. We investigate the importance of incentivized measures for general understanding, as well as domain-specific knowledge of the decision context on the purchase and the quality of index insurance decisions. We evaluate the quality of financial decisions by comparing the individual expected welfare outcomes of a number of decisions each individual makes to purchase index insurance or not. We find that excess purchase is an important driver of welfare losses, and that our incentivized measure of domain-specific literacy plays a critical role in bringing about better quality index insurance decisions.

Suggested Citation

  • Glenn Harrison & Karlijn Morsink & Mark Schneider, 2022. "Literacy and the quality of index insurance decisions," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 47(1), pages 66-97, March.
    • Handle: RePEc:pal:genrir:v:47:y:2022:i:1:d:10.1057_s10713-020-00060-1
    DOI: 10.1057/s10713-020-00060-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/s10713-020-00060-1
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1057/s10713-020-00060-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Daniel J. Clarke, 2016. "A Theory of Rational Demand for Index Insurance," American Economic Journal: Microeconomics, American Economic Association, vol. 8(1), pages 283-306, February.
    2. James E. Matheson & Robert L. Winkler, 1976. "Scoring Rules for Continuous Probability Distributions," Management Science, INFORMS, vol. 22(10), pages 1087-1096, June.
    3. Xiaoxue Sherry Gao & Glenn W. Harrison & Rusty Tchernis, 2020. "Behavioral Welfare Economics and Risk Preferences: A Bayesian Approach," NBER Working Papers 27685, National Bureau of Economic Research, Inc.
    4. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    5. Andreas Ortmann & Ralph Hertwig, 2002. "The Costs of Deception: Evidence from Psychology," Experimental Economics, Springer;Economic Science Association, vol. 5(2), pages 111-131, October.
    6. Camerer, Colin F & Hogarth, Robin M, 1999. "The Effects of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 7-42, December.
    7. Glenn W. Harrison & Jia Min Ng, 2016. "Evaluating The Expected Welfare Gain From Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 91-120, January.
    8. Glenn W. Harrison & John A. List, 2004. "Field Experiments," Journal of Economic Literature, American Economic Association, vol. 42(4), pages 1009-1055, December.
    9. Annamaria Lusardi & Olivia S. Mitchell, 2014. "The Economic Importance of Financial Literacy: Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 52(1), pages 5-44, March.
    10. Glenn Harrison, 2006. "Experimental Evidence on Alternative Environmental Valuation Methods," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 34(1), pages 125-162, May.
    11. Di Girolamo, Amalia & Harrison, Glenn W. & Lau, Morten I. & Swarthout, J. Todd, 2015. "Subjective belief distributions and the characterization of economic literacy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 1-12.
    12. John McPeak & Sommarat Chantarat & Andrew Mude, 2010. "Explaining index‐based livestock insurance to pastoralists," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(3), pages 333-352, November.
    13. Ruth Vargas Hill & Miguel Robles & Francisco Ceballos, 2016. "Demand for a Simple Weather Insurance Product in India: Theory and Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(4), pages 1250-1270.
    14. Dercon, Stefan & Hill, Ruth Vargas & Clarke, Daniel & Outes-Leon, Ingo & Seyoum Taffesse, Alemayehu, 2014. "Offering rainfall insurance to informal insurance groups: Evidence from a field experiment in Ethiopia," Journal of Development Economics, Elsevier, vol. 106(C), pages 132-143.
    15. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
    16. Clarke, Daniel J. & Dercon, Stefan, 2016. "Dull Disasters?: How planning ahead will make a difference," OUP Catalogue, Oxford University Press, number 9780198785576.
    17. Apurba Shee & Calum G. Turvey & Joshua Woodard, 2015. "A field study for assessing risk-contingent credit for Kenyan pastoralists and dairy farmers," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 75(3), pages 330-348, September.
    18. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    19. Sommarat Chantarat & Andrew G. Mude & Christopher B. Barrett & Michael R. Carter, 2013. "Designing Index-Based Livestock Insurance for Managing Asset Risk in Northern Kenya," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 205-237, March.
    20. Glenn W. Harrison & Jia Min Ng, 2019. "Behavioral insurance and economic theory: A literature review," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 133-182, July.
    21. North, Douglass C., 1954. "Life Insurance and Investment Banking at the Time of the Armstrong Investigation of 1905-1906," The Journal of Economic History, Cambridge University Press, vol. 14(3), pages 209-228, July.
    22. Ayako Matsuda & Kazushi Takahashi & Munenobu Ikegami, 2019. "Direct and indirect impact of index-based livestock insurance in Southern Ethiopia," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 44(3), pages 481-502, July.
    23. repec:oup:jeurec:v:15:y:2017:i:2:p:429-462. is not listed on IDEAS
    24. Harrison, Glenn W. & Martínez-Correa, Jimmy & Swarthout, J. Todd & Ulm, Eric R., 2017. "Scoring rules for subjective probability distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 430-448.
    25. Aina, I. & Ayinde, O.E. & Thiam, D. & Miranda, M., 2018. "Willingness to Pay for Index-Based Livestock Insurance: Perspectives from West Africa," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277383, International Association of Agricultural Economists.
    26. Glenn W. Harrison, 2019. "The behavioral welfare economics of insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(2), pages 137-175, September.
    27. Mitchell, Olivia S. & Lusardi, Annamaria (ed.), 2011. "Financial Literacy: Implications for Retirement Security and the Financial Marketplace," OUP Catalogue, Oxford University Press, number 9780199696819.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Glenn W. Harrison, 2024. "Risk preferences and risk perceptions in insurance experiments: some methodological challenges," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 49(1), pages 127-161, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Glenn W. Harrison & Jia Min Ng, 2019. "Behavioral insurance and economic theory: A literature review," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 133-182, July.
    2. Jensen, Nathaniel D. & Mude, Andrew G. & Barrett, Christopher B., 2018. "How basis risk and spatiotemporal adverse selection influence demand for index insurance: Evidence from northern Kenya," Food Policy, Elsevier, vol. 74(C), pages 172-198.
    3. Takahashi, Kazushi & Noritomo, Yuma & Ikegami, Munenobu & Jensen, Nathaniel D., 2020. "Understanding pastoralists’ dynamic insurance uptake decisions: Evidence from four-year panel data in Ethiopia," Food Policy, Elsevier, vol. 95(C).
    4. Berg, Erlend & Blake, Michael & Morsink, Karlijn, 2022. "Risk sharing and the demand for insurance: Theory and experimental evidence from Ethiopia," Journal of Economic Behavior & Organization, Elsevier, vol. 195(C), pages 236-256.
    5. Negi, Digvijay S., 2018. "Tail-dependent Rainfall Risk and Demand for Index based Crop Insurance," 2018 Annual Meeting, August 5-7, Washington, D.C. 274481, Agricultural and Applied Economics Association.
    6. Kubitza, Christian & Hofmann, Annette & Steinorth, Petra, 2019. "Financial literacy and precautionary insurance," ICIR Working Paper Series 34/19, Goethe University Frankfurt, International Center for Insurance Regulation (ICIR).
    7. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.
    8. Glenn W. Harrison, 2019. "The behavioral welfare economics of insurance," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 44(2), pages 137-175, September.
    9. Haile, Kaleab K. & Nillesen, Eleonora & Tirivayi, Nyasha, 2020. "Impact of formal climate risk transfer mechanisms on risk-aversion: Empirical evidence from rural Ethiopia," World Development, Elsevier, vol. 130(C).
    10. Di Girolamo, Amalia & Harrison, Glenn W. & Lau, Morten I. & Swarthout, J. Todd, 2015. "Subjective belief distributions and the characterization of economic literacy," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 59(C), pages 1-12.
    11. Erwin Bulte & Rein Haagsma, 2021. "The Welfare Effects of Index-Based Livestock Insurance: Livestock Herding on Communal Lands," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(4), pages 587-613, April.
    12. Michael King & Anuj Pratab Singh, 2018. "Understanding farmers' valuation of agricultural insurance: Evidence from Vietnam," WIDER Working Paper Series wp-2018-93, World Institute for Development Economic Research (UNU-WIDER).
    13. Ceballos, Francisco & Robles, Miguel, 2020. "Demand heterogeneity for index-based insurance: The case for flexible products," Journal of Development Economics, Elsevier, vol. 146(C).
    14. Williams Ali & Awudu Abdulai & Ashok K. Mishra, 2020. "Recent Advances in the Analyses of Demand for Agricultural Insurance in Developing and Emerging Countries," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 411-430, October.
    15. Bingzheng Chen & Peiyun Deng & Xiaodong Fan, 2022. "Effect of compulsory education on retirement financial outcomes: evidence from China," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(4), pages 958-989, October.
    16. Anuj Singh & Michael King, 2018. "Understanding farmers’ valuation of agricultural insurance: Evidence from Vietnam," WIDER Working Paper Series 93, World Institute for Development Economic Research (UNU-WIDER).
    17. Yanyan Liu & Kevin Chen & Ruth V. Hill, 2020. "Delayed Premium Payment, Insurance Adoption, and Household Investment in Rural China," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(4), pages 1177-1197, August.
    18. Million Tadesse & Bekele Shiferaw & Olaf Erenstein, 2015. "Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 3(1), pages 1-21, December.
    19. Annan, Francis & Datta, Bikramaditya, 2022. "Risk, informal institutions, and index insurance," Journal of Environmental Economics and Management, Elsevier, vol. 113(C).
    20. King, Michael & Singh, Anuj Pratap, 2020. "Understanding farmers’ valuation of agricultural insurance: Evidence from Vietnam," Food Policy, Elsevier, vol. 94(C).

    More about this item

    Keywords

    Index insurance; Behavioural welfare economics; Financial literacy; Insurance literacy;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O2 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:genrir:v:47:y:2022:i:1:d:10.1057_s10713-020-00060-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.