Evolutionary dynamics of collective index insurance.
Index-based insurances offer promising opportunities for climate-risk investments in developing countries. Indeed, contracts conditional on, e.g., weather or livestock indexes can be cheaper to set up than conventional indemnity-based insurances, while offering a safety net to vulnerable households, allowing them to eventually escape poverty traps. Moreover, transaction costs by insurance companies may be additionally reduced if contracts, instead of arranged with single households, are endorsed by collectives of households that bear the responsibility of managing the division of the insurance coverage by its members whenever the index is surpassed, allowing for additional flexibility in what concerns risk-sharing and also allowing insurance companies to avoid the costs associated with moral hazard. Here we resort to a population dynamics framework to investigate under which conditions household collectives may find collective index insurances attractive, when compared with individual index insurances. We assume risk sharing among the participants of each collective, and model collective action in terms of an N-person threshold game. Compared to less affordable individual index insurances, we show how collective index insurances lead to a coordination problem in which the adoption of index insurances may become the optimal decision, spreading index insurance coverage to the entire population. We further investigate the role of risk-averse and risk-prone behaviors, as well as the role of partial correlation between insurance coverage and actual loss of crops, and in which way these affect the original coordination thresholds.
Centro de Biologia Molecular e Ambiental, Universidade do Minho, 4710-057, Braga, Portugal.|Departamento de Matemática e Aplicações, Universidade do Minho, 4710-057, Braga, Portugal.|ATP-Group, 1649-003, Lisbon Codex, Portugal.
Jorge M
JM
Pacheco
ATP-Group, 1649-003, Lisbon Codex, Portugal.|INESC-ID and Instituto Superior Técnico, Universidade de Lisboa, IST-Tagusparque, 2744-016, Porto Salvo, Portugal.
Francisco C
FC
Santos
Department of Ecology and Evolutionary Biology, Princeton University, Princeton, NJ, 08544-1003, USA. slevin@princeton.edu.|Resources for the Future, University Fellow, Washington, DC, 20036, USA. slevin@princeton.edu.|Beijer Institute of Ecological Economics, P.O. Box 50005, 104 05, Stockholm, Sweden. slevin@princeton.edu.
Simon A
http://orcid.org/0000-0002-8216-5639
SA
Levin
D000383:Agriculture / Q000191:economics; D018556:Crops, Agricultural / Q000191:economics; D005191:Family Characteristics; D005716:Game Theory; D006801:Humans; D019458:Insurance Coverage / Q000191:economics* / Q000706:statistics & numerical data; D055641:Mathematical Concepts; D020414:Risk Sharing, Financial; D014887:Weather
Collective action; Evolutionary game theory; Index insurance; Non-linear returns