Dynamic Insurance Demand under Liquidity Constraints
and Possible Insurer Default

LIU Yanyan, Robert Myers

International Food Policy Research Institute
Michigan State University

Abstract:
This study develops a dynamic model of demand for insurance by a risk-averse farmer who can borrow and lend subject to a credit constraint, and also perceives some probability of insurer default. Credit constraints and the possibility of insurer default both reduce the demand for insurance. We then propose a new insurance design that allows farmers to enter an insurance contract while delaying payment of the premium until the end of the insured period. We then show how this new design can effectively increase insurance take-up by relaxing liquidity constraint and ameliorating farmers concerns about insurer default. We also investigate the effects of the associated problem of farmers reneging on their delayed premium payment if the insured event does not occur.

Keyword: agricultural insurance, delayed premium payment, insurance demand, liquidity constraint, insurer default