Insurance for the Poor?

Abstract

Households in developing countries are exposed to high risks, with important consequences for their welfare. It has long been acknowledged that shocks, ranging from individual-specific (such as illness, theft or unemployment) to economy-wide (such as droughts or recessions), have important implications for consumption and nutrition, not least among the poor. Policy responses have mainly focused on safety nets or other social security mechanisms. This chapter goes beyond this view by arguing, first, that the costs associated with these risks are much higher than those estimated from their short-term impact and, second, that expanding insurance provision for the poor could result in substantial long-term welfare benefits. To illustrate this possibility, we use examples, mainly from Latin America, starting from a consideration of how risk affects the poor and the ways in which they respond to it. The chapter assesses the most promising insurance instruments, while emphasizing that expanding insurance provision should not be seen as a panacea, but instead be viewed as part of a comprehensive extension of protection of the poor.

This chapter is based on work initially financed bythe Inter-American Development Bank and by the World Institute of Development Economics Research (WIDER). We would like to thank Luis Tejerina for insightful comments.