Behavioral economic insights on index insurance design

While behavioral economic experiments have uncovered a wealth of insights concerning how people decide in the face of risk and uncertainty, the implications of these insights for the demand for agricultural insurance are under-explored. The purpose of this paper is to report on results from two recent field experiments that measure the extent to which farmer behavior departs from the predictions of expected utility theory and derives the implications of these departures for insurance demand.

Framed behavioral field experiments were played with random samples of West African Cotton farmers who lived in areas that were being incorporated into a cotton insurance pilot program.

Substantial numbers of farmers depart from expected utility behavior in ways that predict excess sensitivity to uncovered basis risk in insurance contracts; and, the fact that insurance premiums are typically framed as certain and unavoidable, while benefits are unknown and stochastic.

Using novel field experimental methods, the work summarized here indicates that more careful design of index insurance contracts in conformity with the findings of behavioral economics could result in larger contract uptake and, ultimately, larger development impacts.