The trusted neighbour effect: Local experience and demand for microinsurance

Karlijn Morsink, Peter GeurtsInstitute of Governance Studies (IGS), University of Twente, The Netherlands

Presentation CSAE Conference 2012, Session ID 53: Risk and Insurance 1Oxford, 13 April 2012

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Trust and demand for microinsurance?

Demand for microinsurance is low and increasing slowly.

Trust Dercon, Gunning and Zeitlin (2011), Clarke (2011)

Trust: ‘The perception of probability that the insurer will pay the claim if the low income household experiences the insured loss is high enough for the low income household to engage in the insurance contract and pay the insurance premium.’

Developing countries: Experiences with insurance in developing countries are often lacking or are characterized by opportunistic behaviour of insurers.

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Formal and informal trust building

Informal trust building emerges from recurrent transactions or is based on social similarity. Often occurs locally.

Formal trust building is tied to formal social structures. Often plays a role at national levels.

….They substitute each other (Granovetter, 1974, Coleman, 1990).

….Informal trust building is disrupted in more modern societies and substituted by formal trust building through for example professions, bureaucracies and financial intermediaries (Zucker, 1986).

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Trust in ‘preventive innovations’

Informal trust building in

‘preventive innovations’ (Rogers, 2003)

Knowing positive experiences with microinsurance of trusted peers in local networks

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Demand for insurance for respondent i

Insurancei = α + β1Knows peers with claimsi +

β2Perception of typhoon riski +

β3Perception of accident riski +

β4Experienced typhoon in the pasti +

β5Experienced accident in the pasti +

β6Experienced insurance claimi +

β7Currently has other insurancei +

β8Had insurance in the pasti + X’iµ + εi 

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Natural calamity insurance in the Philippines: PAID plan

Voluntary insurance.

Affordable for two poorest sections of Philippines society

(USD 5,70 per year).

Residential damage due to typhoon max. USD 228 pay-out.

At time of data collection: 58,000 hh insured and 1500 claims

(mid 2010: 130.000/3000).

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Research design: Focus groups and household survey

Survey three-stage sampling procedure :

1. 3 typhoon-prone regions

2. 11 Villages, with insured and non-insured hh

3. All insured hh (n=69) + random selection of non-insured hh (n=146)

Test on sample of all and on subsample with guaranteed access.

Focus groups (6-20 participants)

Wealth ranking

Event history

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Determinants of microinsurance uptake  

Model 1 (N=171) Model 2 (N = 171) Model 3 (N = 97)

ConstantBad house structureGood house structureWealth rankBad house structure*Wealth rank Good house structure*Wealth rankReceives remittanceNumber of childrenEducationAge in yearsPerception of typhoon riskPerception of accident riskExperienced typhoon in pastExperienced accident in pastExperienced insurance claimCurrently has other insuranceHad insurance in the pastKnows peers with claim 

Nagelkerke R square -2 Log likelihood

-1.694 (.232)                 .169 (.000)***

.13 

-10.510 (.000)3.850 (.051)*2.578 (.365)1.334 (.087)*-1.587 (.119)-1.308 (.242).755 (.121).082 (.525)-.086 (.634).000 (.989)1.654 (.040)**1.982 (.011)**-.032 (.955)-.076 (.899).413 (.505)-.174 (.788).173 (.764)2.143 (.000)*** 

.308 140.510

-6.580 (.024)4.462 (.049)**2.220 (.478)1.284 (.127)-1.630 (.182)-1.102 (.364).849 (.126).052 (.728)-.030 (.886)-.017 (.565)1.008 (.263)1.058 (.222)-.253 (.704)-.270 (.661).347 (.604)-.007 (.992).015 (.982).821 (.144)* 

.264108.024

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Excluding alternative explanations

1. Knows peers with claims is not trust effect but access effect: Either people know peers with claims and therefore become members of CARD. Or people, through CARD membership, know peers with claims

Self-reported reasons >50% report trust as the reason.

2. Location variables knowing peers with claims (0.01 level)

3. Recent typhoon experiences:

prevalence of claims (0.05 level)

prevalence of knowing peers with claims (0.05 level)

amount of PAID plan (0.05 level)

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Excluding alternative explanations

4. Recent typhoon experiences:

risk perception (no significant effect)

Actual typhoon experience no effect on uptake

5. Marketing:

Card branch knows peers with claims (no significant effect)

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Policy and practice considerations

Knows peers with claims represents trust (informal trust building).

Demand increasing slowly because this occurs ex-post.

Short term: invest in peers as part of marketing; Long-term: Build legal and regulatory frameworks.

Trust in specific insurance more important than trust in concept of insurance.

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Implications for other contexts

Knowing peers with claims works only if product offers value.

If trust in organization or government is lower, than likely a stronger effect of knowing peers with claims.

The more negative experiences, the more need for building trust.

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k.morsink@utwente.nl

http://www.utwente.nl/microinsurance

Special thanks to:

CARD MRI and CORDAID supported the field work. Special thanks go to Dr. Aris Alip and Alex Dimaculangan for logistical support. We are also

grateful to Joy Parano-Dimaculangan whose activities as research assistant were supported by CARD MRI.

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Step-interaction wealth rank and house structure