Poor Economics by Abhijit Banerjee

Author:Abhijit Banerjee
Language: eng
Format: epub
Publisher: PublicAffairs
Published: 2011-04-07T16:00:00+00:00

For these reasons, micro insurance may not become the next billion-client market opportunity: There seem to be deep reasons that most people don’t yet feel very comfortable with the kinds of insurance products that the market is willing to offer. On the other hand, the poor clearly bear unacceptable levels of risk.

There is thus a clear role for government action. This does not mean the government needs to substitute for a private insurance market, but for a real market to have a chance to emerge, the government will probably need to step in. Private companies could continue to sell exactly the kinds of insurance they are currently willing to sell (catastrophic care with a strict cap, indexed weather insurance, and so forth). But for the time being, the government should pay a part of insurance premiums for the poor. There is already evidence that this could work: In Ghana, when weather insurance was offered to farmers with a large subsidy on the premium, almost all farmers to whom it was offered took it up. Because the fear of bad shocks leads the poor to costly mitigation strategies, subsidizing insurance could pay for itself in terms of higher incomes for the poor. In Ghana, farmers who had received cheap insurance were more likely to use fertilizer on their crops than those who had not received it, and they were better off as a result. They reported, for example, being much less likely to have missed a meal.22 It is possible that over time, as people start to see how insurance works and the market starts to grow, the subsidy could be phased out. But even if that is not possible, given the enormous potential gains that could be achieved if the poor did not need to be the hedge-fund managers of their own lives, this seems like a great place to use public funds to promote the common good.

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