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Hello, my name is Chris Barrett.
I'm a professor
of Applied Economics and Management
at Cornell University
in the United States.
And today, we'll be discussing
Insurance for Development.
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The general economic case
for insurance
rests on two principles.
The first is that people prefer
stable to unstable consumption.
The easiest way to think about this
is that most of us prefer
to have three meals a day
and only three meals
a day each day.
We prefer not to have
one meal one day,
three, four meals the next day,
six the another day,
so that on average we have three.
So stability is a basic principle
we see in human preferences
for consumption.
What that implies is that
if we have fluctuations
in the income
that we use with
which to buy things to consume,
we will save when we get a paycheck
and then borrow from our savings
to pay for consumables each day
or each week
or we will borrow,
say, using a credit card.
Or in the case of a shocked income,
say, losing a job,
we might draw on insurance,
unemployment insurances
is a common example.
So we try to stabilize consumption
against short-term
income fluctuations
through saving, borrowing,
or insurance.
The second principle
behind insurance
is that the permanent income
we enjoy is threatened by the risk
that we could lose
productive assets.
One of the most obvious ones
is that people die.
So if the principle breadwinner
in a family passes away,
that's a major shock of earnings
permanently to that family.
So people commonly have
life insurance
on the major breadwinner
in a household.
Similarly, we have health insurance
for the prospect of a disruption
of our ability to get to work.
We have property insurance
against the possible loss
of our home or our business
or our automobile, etcetera.
The risk of loss
of productive assets
threatens permanent income.
And so we especially try
to insure against those losses.
Those losses are especially
acutely felt for people
who are at risk of falling
into a poverty trap.
Think of somebody who loses
their home to a fire
but has no home insurance
and has no support system,
they become homeless.
How easy is it for them
to find further employment
and to remain non-poor?
It's terribly difficult.
So most insurance is really
around assets not around income,
it's about protecting
against the catastrophic loss
of the productive assets
on which our future incomes depend
more than on stabilizing income.
And these concerns
are especially acute for the poor
because a small loss
is more acutely felt by poor people
than by rich people
and because the poor
are much less likely to have
safety nets around them
and at greater risk of falling
into a poverty trap.
