11/16/2009 Lecture 19: Insurance Morduch's key argument is that information asymmetry is the reason for insurance not reaching the poor. People know more about themselves than the insurance company -> Moral hazard---insured will behave differently after having insurance -> if you offer insurance, the inherently high-risk people will want insurance the most. but that means high premiums. but that cuts out lower-risk people, which increases premiums more. The other issue is that at the scale of poor villagers, insurance isn't economically efficient for insurers Techniques insurers use to avoid adverse selection - pre-screen clients - put in stipulations dictating what kinds of behavior/issues they don't cover Morduch says that assymetric information and inefficient economies of scale are what initially held back microfinance. So he's positive about microinsurance. =Life Insurance= Currently done in burial societies successfully (mostly as funeral insurance) Moral hazard is unlikely to matter, since you're unlikely to risk dieing just because your funeral is covered Avoid adverse selection because everyone will die eventually Economy of scale doesn't apply, since villagers meet weekly and can pool money at that point anyway Unclear whether this can avoid cost at village level by a company coming in. Company has to have someone collect small ammts. of money at high cost A village can tell if someone is lying about dieing. A company has a harder time doing this. =Rainfall Insurance= Instead of crop yield insurance, rainfall insurance is a good idea. No moral hazard/adverse selection---you're insuring against the weather happening, rather than just crop yield going down. The interests of insurance company and farmer are aligned to keep crop alive. Issue with it is that it results in correlated failures in a closed region. This increases the aggregate risk. So you need to pool risk across multiple regions, requiring more sophisticated/larger insurance company.