Microinsurance And Consumption Smoothing Among Low-Income Households In Ghana

The literature indicates that the usage of meals reduction to cope with risk does not improve upon household's welfare. So in this study we inquire whether microinsurance is a better alternative for coping with shocks. In particular we ask: is microinsurance a viable option for smoothing consumption instead of reduction in the number of meals consumed per day? The microinsurance products in this study were not randomised. Households have the free will to either buy or reject these products. The option to choose creates room for self-selection and endogeneity bias which can produce inconsistent estimates. So we employed three models to resolve these biases: Heckman sample selection, treatment effect model and instrumental variable modelling. Each of these models has a unique advantage in correcting selection and endogeneity bias. Data on low-income households comprising the insured and the uninsured was extracted from the 2010 FINSCOPE survey for the empirical estimation. The Heckman model shows that insured households are 20.7% less likely to forgo daily meals when faced with risks. The treatment effects model shows a similar result of 19.3%. The impact is even larger (i.e. 22.3%) if unobserved factors are accounted for through the instrumental variable technique. The summary of the three estimations is that microinsurance improves insured households' consumption smoothing and food security by eliminating under-nutrition and malnourishing actions such as reduction in food intake. This is a strong indication that microinsurance is a good option for managing consumption smoothing among low-income households. The value of microinsurance is not just the transfer of risk but most essentially the empowerment of low-income households to adopt effective consumption smoothing actions which are critical for healthy living and human capital growth. This has implications for financial sector policies in developing countries. In particular policies that promote access to microinsurance and its integration into governments' welfare programs will have a tremendous impact on developing economies' policies of reducing poverty through human development.