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Insurance and Savings Discussion Questions

  • What did you choose?

  • How did you make your choice?

  • Would it make sense to pool savings across your community, the entire project?

  • Would it be difficult to determine how much savings to use/share during a drought?

  • What are some strategies to use to decide how to spend savings in a drought?

  • Does a coin put into insurance yield a larger end of season value if there is a drought?

  • Would you want to set up an initial pot of money (perhaps from a donor) so that contributions to savings are topping off a complimentary risk fund to keep it sustainable?

Key points

Many insurance projects build personal or community savings into the package.
For the HARITA/R4 project in Ethiopia, we offered farmers cash at the beginning of the season, gave them multiple options, including insurance and savings, and then came back at the end of the season and paid them based on what they had chosen.

Overall they put about twice as much money into premiums than savings or 6 or 7 coins out of ten into insurance (Norton et al, 2014). We have done this in projects around the world and seen similar choices. How did this compare with what you chose?

Often, there are discussions about setting up a large humanitarian fund that can make payments the size of the insurance, based on calculations based on the error rate of the insurance.

We taught a Capstone Class in SIPA at Columbia, where the students calculated the size of a complimentary fund to cover all of the error between when index insurance would have paid out in past years, and what droughts farmers remembered.
This is would be a overly large savings fund calculation, as it includes both errors in the insurance, as well as errors in farmers recollections.
They calculated both how much farmers would pay each year to keep the fund stable, as well as the initial amount that would be needed to set up the fund.

In that class Establishing a Complementary Risk Fund for Index Insurance, It was calculated that if about 60% of the farmers would go to insurance and 40% would go to the fund, the fund would have enough to cover all of the insurance error across the entire project, and the fund should be setup at a bit less than 20% of the entire possible insurance payout across the project.

This was mostly driven by errors that would have happened in the 1980s, a fund focusing on the 2000s to now would put more money in insurance, and the fund size would be more like 13-14% of the biggest possible insurance payout.

However, it is an unsolved question how the project would decide if there was a problem with the insurance payouts, and how much to pay people each year.

The next year's class looked into strategies that might combine satelite measurements with targeted yield measurements in a way that could be used to either reduce the error of insurance, or to allocate payouts from the complimentary fund Expanding Insurance Coverage: Hybrid Index Solution for Small Farmers

If you want to quantify the error rate of insurance, you can use tools like the ones described in bit.ly/insurepeople to generate what insurance payouts would have been, and compare those to focus groups or phone games (which we have done with many partners across thousands of villages in dozens of countries).

You can then put those error rates, and payout rates, along with realistic prices and yield values into our online game generator: User BETTERINDEXES, Password IRI to build a game just like what you just played, but with real numbers.