Informal Insurance in Social Networks

This paper studies informal insurance across networks of individuals. Two characteristics are fundamental to the model developed here: First, informal insurance is a bilateral activity, and rarely involves explicit arrangements across several people. Second, insurance is a social activity, and transfers are often based on norms. In the model studied here, only directly linked agents make transfers to each other, although they are aware of the (aggregate) transfers each makes to third parties. An insurance scheme for the network as a whole is an equilibrium of several interacting bilateral arrangements. This model serves as a starting point for investigating stable insurance networks, in which all agents actually have private incentives to abide by the ongoing insurance arrangement. The resulting analysis shows that network links have two distinct and possibly conflicting roles to play. First, they act as conduits for transfers, and in this way this make better insurance possible. Second, they act as conduits for information, and in this sense they affect the severity of punishments for noncompliance with the scheme. A principal task of this paper is to describe how these two forces interact, and in the process characterize stable networks. The concept of "sparse" networks, in which the removal of certain links increases the number of network components, is crucial in this characterization. As corollaries, we found that both "thickly connected" networks(such as the complete graph) and "thinly connected" networks (such as trees) are likely to be stable, whereas intermediate degrees of connectedness jeopardize stability. Finally, we study in more detail the notion of networks as conduits for transfers, by simply assuming a punishment structure (such as autarky) that is independent of the precise architecture of the tree. This allows us to isolate a bottleneck effect: the presence of certain key agents who act as bridges for several transfers. Bottlenecks are captured well in a feature of trees that we call decomposability, and we show that all decomposable networks have the same stability properties and that these are the least likely to be stable.social networks, informal insurance

Informal Insurance in Social Networks

social networks, informal insurance.

Social Interactions in Growing Bananas: Evidence from a Tanzanian Village

This paper analyses whether agricultural information flows give rise to social learning effects in banana cultivation in Nyakatoke, a small Tanzanian village. Based on a village census, full information is available on socio-economic characteristics and banana production of farmer kinship members, neighbours and informal insurance group members. This allows a test for social learning within these groups and the identification of different types of social effects. Controlling for exogenous group characteristics, the effect of group behaviour on individual farmer output is studied. The results show that social effects are strongly dependent on the definition of the reference group. It emerges that no social effects are found in distance based groups, exogenous social effects linked to group education exist in informal insurance groups, and only kinship related groups generate the endogenous social effects that produce positive externalities in banana output.social interactions, social learning, agricultural information networks

Does Finance Make Us Less Social?

Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-difference and Spatial First Difference tests confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard

Consumption Risk-sharing in Social Networks

We develop a model of informal risk-sharing in social networks, where relationships between individuals can be used as social collateral to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements and obtain two results. (1) The degree of informal insurance is governed by the expansiveness of the network, measured by the number of connections that groups of agents have with the rest of the community, relative to group size. Two-dimensional networks, where people have connections in multiple directions, are sufficiently expansive to allow very good risk-sharing. We show that social networks in Peruvian villages satisfy this dimensionality property; thus, our model can explain Townsend's (1994) puzzling observation that village communities often exhibit close to full insurance. (2) In second-best arrangements, agents organize in endogenous "risk-sharing islands" in the network, where shocks are shared fully within, but imperfectly across islands. As a result, network based risk-sharing is local: socially closer agents insure each other more.

Micro insurance in Tanzania: Demand Perspectives

This study addresses three distinct but interrelated areas in the micro insurance sector in Tanzania a) demand perspectives of micro insurance in the informal sector b) examining strengths and weakness of current risk coping strategies in the informal sector c) examining household’s characteristics that influence demand for micro insurance. The study analyses data from a primary survey and focus group discussion derived from informal sector households’ members of the VIBINDO society in three districts of Ilala, Kinondoni and Temeke in Dar es Salaam. The analysis involves three steps; first, household’s major risk exposures were analysed, secondly risk coping strategies which were in place were examined and thirdly, a probit regression analysis was conducted to establish the relationship between households’ characteristics and demand for micro insurance in the informal sector. There are three major findings from this study: Firstly, the results indicate that employment, marital status, use of financial services, education, risk exposure and insurance knowledge are significant determinants of micro-insurance demand. Insurance knowledge and trust of insurers were found to have a positive and significant impact on the demand for micro insurance. Contrary to expectations, the empirical analysis shows that income is a significant determinant with a negative impact on micro insurance demand. Secondly, the findings suggest that demand for micro insurance in the informal sector depends on the competitive advantage between formal insurance services and available informal techniques. Informal techniques have important informational advantages due to their close physical proximity and frequent, repeated interactions. This implies that some inferences can be drawn from the design and development of micro insurance. The analysis highlights different approaches to be taken by insurers in designing micro insurance products. Thirdly, there is evidence to suggest that pre-existing informal sharing networks affect demand for micro insurance. The low demand for micro insurance can be explained by available informal arrangements which are characterized by closely knit social networks and groups that provide security in exchange for loyalty to the group. Also, uncertainty avoidance culture is low within the households in Tanzania, hence households seem to be more tolerate to different situations. The findings recommend strategies for micro insurance expansion in the informal sector, which is therefore useful for the expansion of financial services

Adverse Shocks and Social Protection in Africa: What Role for Formal and Informal Financial Institutions?

This paper presents evidence on the wide range of adverse shocks reported by African households. The current financial and economic crisis adds another layer of risk to al-ready vulnerable households and firms. In responding to an adverse shock, households are involved in a balancing act that is aimed at maintaining consumption and/or assets above critical levels. Households mainly use coping mechanisms that depend on family and other networks and self-insurance. There is limited recourse to public social protection and formal credit and insurance markets. The paper examines some informal financial arrangements. Some of these are not designed to smooth consumption when there is an adverse shock. These informal mechanisms have the potential to be the platform to expand access and utilisation of formal finance particularly in rural communities. There is a clear role for publicly provided interventions. This is because informal risk sharing mechanisms do not cover all shocks. The premium paid may not be adequate to cover the entire financial implications of the shock. Finally, the design of the risk-sharing institutions can result in the very poor being excluded.

9Socio-economic adaptation strategies of the urban poor in the Lagos metropolis, Nigeria

This article investigates the survival strategies of the urban poor in Lagos metropolis. The study considers the socio-economic characteristics as well as the livelihood patterns and strategies employed in the absence of formal social security systems. The research adopts a purposive sampling of 396 household heads in 31 low-income residential neighbourhoods in the Lagos metropolis. Data were obtained by the administration of structured questionnaires, and analysis was done by both parametric and non-parametric methods. The research revealed that most of the respondents were involved in informal trade enterprises and were living below the national poverty line, as mode household monthly income was between $50 and$125. The importance of informal social networks – especially rotating credit and ethnic alliances as social security and insurance mechanisms of the respondents – was highlighted. The study concludes by recommending measures for building on the identifi ed strengths of the urban poor, which includes civic engagement and partnering with informal social networks to provide opportunities for poverty alleviation in the communities.Keywords: Ethnic alliance; informal economy; Lagos; poverty; rotating credi

Constraints and potential of livestock insurance schemes: a case study from Vietnam

Livelihood systems of poor rural households are often so fragile that a small misfortune can destabilize households for years. Strategies for coping with risk include informal mutual aid agreements and/or formal microinsurance schemes. In developing countries, insurance markets are usually underdeveloped.Nevertheless, if the development path is supported by strong structures and institutions, anonymous markets will, over time, replace informal insurance networks as they are more efficient. In Vietnam, livestock is an important household income source and has additional non-economic functions in the households. For a long time, rural financial institutions in Vietnam financed only a small array of agricultural investments, but these frequently included livestock purchase. The absence of off-farm investment possibilities further promotes investment in livestock production. Failure of an investment, especially when loan-funded, can leave a household in an extremely vulnerable position. Livestock death is considered to be a major factor contributing to poverty. Farmers using credit to purchase livestock face two risks at once: (1) loss of the livestock due tovdisease and subsequently (2) failure of investment. Farmers would like to reduce the uncertainty, but a broad-based livestock insurance scheme does not exist in Vietnam. There are only a few formal and semi-formal schemes with very limited outreach. Thus, access to formal insurance is almost non-existent, and farm households have to rely mainly on informal mutual aid schemes within their social networks to reduce their risks. The objective of this paper is to contribute to the discussion on the general feasibility of a livestock insurance scheme in Vietnam. In this context, the demand for and supply of livestock insurance schemes is discussed. Quantitative (N=322) and qualitative data collection took place between 2001 and 2004. The quantitative data comprise cross-sectional household-level data from three different districts in Northern Vietnam. Four different types of insurance providers were selected for analyzing the supply side: 1. Insurance tied to credit within a state-owned company; 2. Insurance tied to credit within a development project; 3. A state-owned insurance company (which collapsed); 4. A private insurance company. By selecting these different insurance providers, the range of livestock insurance types offered in Vietnam was covered. The main result is that provision of sustainable livestock insurance is hampered principally by unreliable data on livestock mortality and by premia that are set politically at a low evel

Consumption Risk-sharing in Social Networks

We build a model of informal risk-sharing among agents organized in a social network. A connection between individuals serves as collateral that can be used to enforce insurance payments. We characterize incentive compatible risk-sharing arrangements for any network structure, and develop two main results. (1) Expansive networks, where every group of agents have a large number of links with the rest of the community relative to the size of the group, facilitate better risk-sharing. In particular, “two-dimensional” village networks organized by geography are sufficiently expansive to allow very good risk-sharing. (2) In second-best arrangements, agents organize in endogenous “risksharing islands” in the network, where shocks are shared fully within but imperfectly across islands. As a result, risk-sharing in second-best arrangements is local: socially closer agents insure each other more. In an application of the model, we explore the spillover effect of development aid on the consumption of non-treated individuals.