Literacy and the quality of index insurance decisions

Glenn Harrison, Karlijn Morsink () and Mark Schneider ()
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Karlijn Morsink: Utrecht University
Mark Schneider: Georgia State University

The Geneva Risk and Insurance Review, 2022, vol. 47, issue 1, No 5, 66-97

Abstract: Abstract There is widespread concern in developing countries with the expansion of formal insurance products to help manage significant risks. These concerns arise primarily from a lack of understanding of insurance products, general failures of financial literacy and the need to use relatively exotic products in order to keep costs down for poor households. We investigate the importance of incentivized measures for general understanding, as well as domain-specific knowledge of the decision context on the purchase and the quality of index insurance decisions. We evaluate the quality of financial decisions by comparing the individual expected welfare outcomes of a number of decisions each individual makes to purchase index insurance or not. We find that excess purchase is an important driver of welfare losses, and that our incentivized measure of domain-specific literacy plays a critical role in bringing about better quality index insurance decisions.

Keywords: Index insurance; Behavioural welfare economics; Financial literacy; Insurance literacy (search for similar items in EconPapers)
JEL-codes: D78 D81 D90 O2 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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DOI: 10.1057/s10713-020-00060-1

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