1. The trusted neighbour effect: Local experience and demand for microinsurance Karlijn Morsink, Peter Geurts Institute of Governance Studies (IGS), University of Twente, The Netherlands Presentation CSAE Conference 2012, Session ID 53: Risk and Insurance 1 Oxford, 13 April 2012

2. 13/04/2012 Trust and demand for microinsurance?  Demand for microinsurance is low and increasing slowly.  Trust  Dercon, Gunning and Zeitlin (2011), Clarke (2011)  Trust: ‘The perception of probability that the insurer will pay the claim if the low income household experiences the insured loss is high enough for the low income household to engage in the insurance contract and pay the insurance premium.’  Developing countries: Experiences with insurance in developing countries are often lacking or are characterized by opportunistic behaviour of insurers.

3. 13/04/2012 Formal and informal trust building  Informal trust building emerges from recurrent transactions or is based on social similarity. Often occurs locally.  Formal trust building is tied to formal social structures. Often plays a role at national levels. ….They substitute each other (Granovetter, 1974, Coleman, 1990). ….Informal trust building is disrupted in more modern societies and substituted by formal trust building through for example professions, bureaucracies and financial intermediaries (Zucker, 1986).

4. 13/04/2012 Trust in ‘preventive innovations’ Informal trust building in ‘preventive innovations’ (Rogers, 2003) Knowing positive experiences with microinsurance of trusted peers in local networks

5. 13/04/2012 Demand for insurance for respondent i Insurance i = α + β 1 Knows peers with claims i + β 2 Perception of typhoon risk i + β 3 Perception of accident risk i + β 4 Experienced typhoon in the past i + β 5 Experienced accident in the past i + β 6 Experienced insurance claim i + β 7 Currently has other insurance i + β 8 Had insurance in the past i + X’ i µ + ε i

6. 13/04/2012 Natural calamity insurance in the Philippines: PAID plan  Voluntary insurance.  Affordable for two poorest sections of Philippines society (USD 5,70 per year).  Residential damage due to typhoon  max. USD 228 pay-out.  At time of data collection: 58,000 hh insured and 1500 claims (mid 2010: 130.000/3000).

7. 13/04/2012 Research design: Focus groups and household survey  Survey three-stage sampling procedure : 1.3 typhoon-prone regions 2.11 Villages, with insured and non-insured hh 3.All insured hh (n=69) + random selection of non-insured hh (n=146)  Test on sample of all and on subsample with guaranteed access.  Focus groups (6-20 participants)  Wealth ranking  Event history

8. 13/04/2012 Determinants of microinsurance uptake Model 1 (N=171)Model 2 (N = 171) Model 3 (N = 97) Constant Bad house structure Good house structure Wealth rank Bad house structure*Wealth rank Good house structure*Wealth rank Receives remittance Number of children Education Age in years Perception of typhoon risk Perception of accident risk Experienced typhoon in past Experienced accident in past Experienced insurance claim Currently has other insurance Had insurance in the past Knows peers with claim Nagelkerke R square -2 Log likelihood -1.694 (.232).169 (.000)***.13 -10.510 (.000) 3.850 (.051)* 2.578 (.365) 1.334 (.087)* -1.587 (.119) -1.308 (.242).755 (.121).082 (.525) -.086 (.634).000 (.989) 1.654 (.040)** 1.982 (.011)** -.032 (.955) -.076 (.899).413 (.505) -.174 (.788).173 (.764) 2.143 (.000)***.308 140.510 -6.580 (.024) 4.462 (.049)** 2.220 (.478) 1.284 (.127) -1.630 (.182) -1.102 (.364).849 (.126).052 (.728) -.030 (.886) -.017 (.565) 1.008 (.263) 1.058 (.222) -.253 (.704) -.270 (.661).347 (.604) -.007 (.992).015 (.982).821 (.144)*.264 108.024

9. 13/04/2012 Excluding alternative explanations 1.Knows peers with claims is not trust effect but access effect: Either people know peers with claims and therefore become members of CARD. Or people, through CARD membership, know peers with claims Self-reported reasons >50% report trust as the reason. 2. Location variables  knowing peers with claims (0.01 level) 3. Recent typhoon experiences:  prevalence of claims (0.05 level)  prevalence of knowing peers with claims (0.05 level)  amount of PAID plan (0.05 level)

10. 13/04/2012 Excluding alternative explanations 4. Recent typhoon experiences:  risk perception (no significant effect) Actual typhoon experience no effect on uptake 5. Marketing: Card branch  knows peers with claims (no significant effect)

11. 13/04/2012 Policy and practice considerations  Knows peers with claims represents trust (informal trust building).  Demand increasing slowly because this occurs ex-post.  Short term: invest in peers as part of marketing; Long-term: Build legal and regulatory frameworks.  Trust in specific insurance more important than trust in concept of insurance.

12. 13/04/2012 Implications for other contexts  Knowing peers with claims works only if product offers value.  If trust in organization or government is lower, than likely a stronger effect of knowing peers with claims.  The more negative experiences, the more need for building trust.

13. 13/04/2012 k.morsink@utwente.nl http://www.utwente.nl/microinsurance Special thanks to: CARD MRI and CORDAID supported the field work. Special thanks go to Dr. Aris Alip and Alex Dimaculangan for logistical support. We are also grateful to Joy Parano-Dimaculangan whose activities as research assistant were supported by CARD MRI.

14. 13/04/2012 Step-interaction wealth rank and house structure