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PREM Working Paper 07-05: Demand assessment and test of commercial viability of crop insurance in Bangladesh
The aims of the study presented in this paper are to assess the demand for and test the commercial viability of a crop insurance scheme in different natural disaster-prone areas in Bangladesh, as an alternative poverty alleviation and natural disaster mitigation strategy. In a large scale household survey carried out at the end of 2006, 3600 riverine and coastal floodplain residents in Bangladesh were asked for their preferences for crop insurance schemes using the double bounded contingent valuation (CV) method. For example, asking them for their willingness to pay (WTP) for crop insurance schemes to eliminate future catastrophe risks. We find crop insurance demand to be positively correlated with household head’s primary occupation, land ownership and size of agricultural farm land. Our study further reveals that crop damage cost and households’ willingness to pay to reduce damage vary significantly across the nature of the disaster risk. Using the data collected through household survey, we tested our simple analytical model of commercial viability of a crop insurance scheme by comparing the future value of expected premium receivable by insurer, with the expected indemnity payable to the insured. Assuming zero administrative cost and 10% interest rate per annum, we find crop insurance schemes are marginally viable in riverine flood plain areas (both embanked and unembanked). The difference between the average expected indemnity payment and the future value of expected insurance premium is way too high for the nature of risk and amount of damage cost faced by households living in haor basin and coastal floodplain areas.
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