labor is differentially influenced according to income, with insurance sharply decreasing the reliance on child labor among households suffering moderate poverty but needing to be bundled with microcredit to similarly affect very poor households.

# **Agricultural microinsurance**

IFAD<sup>18</sup> in its 2011 Rural Property Report states that 50% of the World’s population and 70% of the developing world’s extremely poor live in rural areas. Sub Saharan Africa’s is more agriculture dependent with 70% of its population living in rural areas: it is the only region where extreme poverty is increasing. However total agricultural insurance premiums in Africa are only slightly more than in Australia and New Zealand, which have a small fraction of Africa’s population, are highly urbanized and provide no government subsidy.

IFAD proposes a four element agenda to address rural poverty:

- 1.Improve the overall environment of rural areas, including infrastructure, utilities, services and governance.

- 2.Enable poor rural people to manage risk and reduce the level of risk they face.

- 3.It is fundamental to invest in education.

4.There is an ongoing need to strengthen the collective capabilities of rural people.

Regarding the credit-insurance nexus Karlan et al. (2012) in a Ghana study find that relaxing liquidity constraints alone has no significant effect on agricultural investment whereas relaxing the risk constraint by providing crop insurance has a substantial positive impact on investment in the risky asset. De Bock and Oniveros find studies showing reduced asset sales (Cambodia, Kenya), more use of specialized crops (India) and a willingness to experiment with risky swine breeding investments in China (Cai et al. 2009) when insurance is involved. A reduction in debt and a switch from informal to formal debt is also noted in some studies.

Cai (2013) uses a household panel covering the 2000 to 2008 period provided by the Rural Credit Cooperative of China to explore the impact of weather insurance (compulsory case for certain regions) on tobacco production, borrowing and savings decisions. A two stage model employing difference in difference regression is employed. He finds that the introduction of insurance increases the production area of insured crops but that production diversification is reduced. He also finds that a long term increase in demand for credit occurs while a medium term drop in savings rate is noted. Finally, in line with Clarke’s model he finds that the impacts are greater for larger farmers, although this was also found for those with lower remittance incomes.

Another recent study by Sandmark et al (2013) that examines the current state of play with agricultural microinsurance begins by pointing out that this subject is garnering increasing high level interest because of a growing concern about food security<sup>19</sup> and climate change. This may account for the fact that the greatest government support for agricultural insurance is to be found in high population emerging countries, including China, India, Mexico and Brazil.<sup>20</sup> Markets are growing considerably more slowly in countries without such support. The authors explain that certain single hazard risks (hail, fire) can be insured in private markets but that broad yield or revenue based coverages tend to attract subsidies (including in industrial countries).<sup>21</sup> The trade-off then becomes

> 18 International Fund for Agricultural Development

> 19 For a more complete discussion of insurance and food security see Swiss Re., Sigma 1, 2013.

> 20 Direct subsidies are also usually accompanied by investment in research into public goods such as relevant expertise, granular meteorological and crop production time series and supportive public policy.

> 21 Almost two thirds of 104 countries surveyed in a recent World Bank Report provide subsidies, typically at around 50% of the market premium.

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