India and Kenya - Social Networks, Financial Literacy and Index Insurance


  • PROJECT TITLE: Social networks, financial literacy and index insurance in Kenya and India
  • TARGET SEGMENT: Rural, small-scale farmers
  • EVALUATION TEAM: Xavier Giné (World Bank), Dean Karlan (Innovations for Poverty Action), Mũthoni Ngatia (Innovations for Poverty Action)
  • PARTNERS: FSD-Kenya; Equity Bank; APA Insurance; Rũĩrĩ and Ntima Coffee Farmer Cooperative Societies; ICICI-Lombard
  • TIMELINE: March 2011 - March 2012


Regarded as a promising alternative to traditional crop insurance, market participants, NGOs, donors, and governments are all testing the applicability of index based weather risk management instruments in different contexts. A significant advantage of this type of product is that payouts can be calculated and disbursed quickly and automatically without the need for households to formally file a claim because they are based on measured rainfall. This, in turn, reduces transaction costs, which would otherwise tend to drive up the price of the insurance. Fast payouts are also likely to be valued by policyholders in an environment where households are poor and often liquidity-constrained. A second advantage is that the product is free of adverse selection and moral hazard problems that often plague insurance markets. This is because payouts are based only on publicly-observed data, rather than private information about the beneficiary.

The goal of this study is to examine the role of financial literacy on farmers' decisions to purchase index-based weather insurance and to examine social network spillovers of financial literacy provision in Kenya and India. The researchers propose to benchmark these effects with the effect of providing discount vouchers off the price of insurance.

There has been limited empirical evidence to date on the importance and impact of the financial literacy efforts on farmer understanding and take-up. When participation is voluntary, the presentation and explanation of a product is the primary method of encouraging participation. As a result, the information provided and the means to convey it are critical for the success of the program. In addition, spillovers from information dissemination are likely to occur and should be measured when assessing the efficacy of financial literacy efforts.

The study uses comics as the central financial literacy delivery mechanism. The comic used in this study describes a family which had faced a drought in the previous season. The drought had adverse effects on their savings and well-being. The comic carefully details the index-insurance product and shows how it can help the family protect themselves from the risk of drought. The comic presents the insurance product in an accessible and relevant manner and has sustainability as an educational tool as it can further be shared with other farmers.

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