The Dynamics of Insurance Demand Under Liquidity Constraints and Insurer Default Risk

This paper studies the dynamics of insurance demand by risk-averse farmers who can borrow and lend subject to a credit constraint and who also perceive a risk of insurer default. It proposes an alternative insurance design that allows farmers to enter an insurance contract while delaying payment of the premium until the end of the insured period. It also investigates the effects of the associated problem of farmers reneging on their delayed premium payment if the insured event does not occur.The paper states that credit constraints and the possibility of insurer default reduce the demand for insurance. It demonstrates that the alternative design can increase insurance take-up by relaxing liquidity constraints and assuaging farmers concerns about insurer default. Conclusions include:

• Delayed premium payment could play an important role in agricultural insurance markets and programs in developing countries;
• Delayed premium payment will be effective, if the problem of farmers reneging on premium payments when the insured event does not occur is addressed;
• Excluding farmers from future participation in the insurance market or program if they renege might overcome the reneging problem.