Effects of Microinsurance on Informal Safety Nets – a Model-Based Analysis

The fight against hunger is an urgent global challenge. Microinsurance is promoted as a tool for improving food security and resilience for poor smallholders. But assessment studies of such policies show that apart from direct positive effects they may have unintended side effects. One potential side effect is that the introduction of microinsurance products may lead to a crowding out of informal safety nets. Informal safety nets are traditional arrangements of households to share risk, where income shocks are buffered by an exchange of money, labor, or in-kind goods. A loss of informal safety nets may lead to rising social inequality if poor households get excluded but cannot afford microinsurance.

With the help of a stylized agent-based model combined with instruments of social network analysis, we investigate under which conditions microinsurance will crowd out informal safety nets and under which conditions both can act as complements. The informal safety net, in our model, comprises a network where the nodes are households; links between two households represent their level of trust in each other. Households who suffer a shock may receive transfers from households with whom they share a link. The households decide about transfer payments based on their experience, current strategic and economic situation, and their individual preferences. This is incorporated in decision rules based on altruism, trust, reciprocity, expected utility, or learning.

Model construction and analysis are inspired by two case studies with different risk contexts. A first case study in northern Kenya and southern Ethiopia considers the consequences of weather insurance against drought in a pastoral social-ecological system. The second case study in Cambodia investigates whether voluntary health insurance can have unintended consequences. We test to which extent formal decision rules can map the observed behavior and assess the dynamics in informal safety nets given access to microinsurance.