Financial Literacy Vs Insurance Literacy

Published Date: 02 Nov 2017

Despite the growing interest in financial literacy on the part of governments, development agencies and researchers, defining and measuring this concept is no straightforward task. Financial literacy is a relatively ambiguous idea which can refer to specifics such as knowledge and awareness of financial concepts and products, as well as financial skills like calculating loan repayments, but can also refer to more general financial capabilities like budgeting and using basic financial products. [1] In other words, the concept of financial literacy can range from a narrower focus on knowledge of financial products and ideas, to a broader general ability or capability to utilize financial services and products in a day-to-day manner.

The term "financial capability" has been coined to encompass this broader concept and a consensus seems to be emerging that this idea is what practitioners and researchers are most interested in measuring and influencing. In recent papers, both the World Bank and OECD propose working definitions of financial literacy in line with this broader definition. [2] A useful definition of financial literacy is the one used by the OECD: "A combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial wellbeing". [3] 

Measurement of financial literacy

Quantifying and measuring financial literacy or capability is also not a clear-cut process and making international comparisons on the basis of country-specific surveys is difficult for many reasons such as: non-standardized definitions of financial literacy, cultural differences, limited data, idiosyncratic country-specific features, and methodological differences between various studies. [4] In order to mitigate some of these issues, both the World Bank in conjunction with the Russia Trust Fund and the OECD have been working to develop a standardized framework for establishing baseline financial literacy levels and for tracking these levels over time in developing countries. Both organizations have developed publicly-available survey tools, which are similar. The methodology utilized in the World Bank’s survey tool is based roughly on measuring the following five items which were identified as particularly relevant with regards to financial capability: keeping track; making ends meet; planning ahead; choosing products; and staying informed. [5] 

Financial literacy vs. insurance literacy

Financial literacy could be expected to function in some ways as a proxy for insurance literacy as insurance is one product offered under a broader financial services umbrella. However, while they are similar concepts, a distinct concept of insurance literacy can also be discussed. Drawing on the broader definition of financial literacy as financial capability, the idea of insurance literacy as "insurance capability" can also be loosely defined. In a manner analogous to financial capability, this concept would not only focus on insurance-specific knowledge, but also more broadly on confidence, skills, and behaviours relating to insurance. This perspective was roughly adopted in a recent study by Olapade and Frölich in the Philippines to measure the impact of insurance education on three main outcomes: knowledge; attitudes; and behaviour. [6] 

A lack of basic knowledge of insurance is clearly a challenge for microinsurance schemes, as experience from India has shown microinsurance provider's clients complaining that their premiums were not returned after a normal year, clearly showing a lack of understanding of the basic functioning of insurance. [7] Insurance-specific knowledge can clearly be measured in a population. This could be done through survey questions about insurance in general, or product specific features relating to sub-types of insurance such as index insurance, health insurance, life insurance, and so on. Olapade and Frölich measured insurance-specific knowledge through a questionnaire which recorded a subjective self-assessment of insurance knowledge as well as an objective measure of insurance knowledge. [8] A similar approach was taken by Ackah & Owusu to measure insurance literacy in Ghana. [9] 

The impact that attitudes have with regards to financial products may play a significant role in decisions people make with respect to financial matters. [10] These attitudes relating to insurance can be established via survey or questionnaire. One way to do so is to provide respondents a range of possible answers to ambiguous questions where answer choices reflect client’s attitudes. For example, a prospective insurance client could be asked "Insurance is ______" and asked to fill in the blank with a range of choices ranging from good / helpful, to bad / wasteful. From this data, an index can be created to reflect attitudes towards insurance. This general approach has been recently used by Olapade and Frölich and Ackah & Owusu . [11] Carpena et al. used a survey with hypothetical situations which asked respondents to provide advice as a way to tease out attitudes and perceptions relating to financial matters. [12] 

Lastly, insurance behaviour can be determined through questionnaire, survey or through contact with local insurance companies which would establish the insurance status of respondents.

Further research on the correlation between insurance literacy and financial literacy would enable greater understanding of how attitudes, behaviours, and capabilities with respect to insurance differ from other financial products. This knowledge could enable more effective design of potential education campaigns.

Financial literacy and demand for financial services

The impact that financial literacy may have on the demand for financial services and ultimately the well-being of households and individuals is an area of much current research and debate. Recent research shows a clear correlation between lower levels of financial literacy and numerous adverse financial outcomes. [13] While there is a clear correlation and general consensus on the relationship between financial literacy and certain outcomes, establishing the causality of this relationship is what many researchers are ultimately concerned with. The relevant question is "would higher levels of financial literacy cause better outcomes in terms of well-being?" On this point, there is less consensus. This is a rather new topic to receive substantial research interest, and many questions remain unanswered. As evidence of the recency of interest, a study by the Fannie Mae foundation found that in the United States three-quarters of consumer literacy programs were started in the late 1990s or later. [14] 

To date, the evidence on the causal effect of increased financial literacy to induce behaviour change and improve welfare is ambiguous. A number of studies have shown significant effects of financial literacy training programs, materials or games on demand for financial services, while a seemingly equal number have found little or no effect. At a high level, there seems to be scant evidence that these programs are effective in the aggregate. [15] 

Part of this lack of consensus may stem from the lack of an agreed theory of how financial literacy training ultimately leads to behaviour change, and the questionable hypothesis tested by some researchers that simply improving knowledge will, by itself, lead to behaviour change. [16] Insights from behavioural economics and psychology may play an important, complementary role in explaining how people make financial decisions and what role financial literacy plays in that decision-making process.

Evidence from studies in developed countries

A select number of influential relevant recent studies analyzing the effect of financial literacy programs in developed countries are shown in table 2.

Table 2: Select Papers regarding Financial Literacy in the Developed Country Context

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the effect of Financial Literacy

Bernheim and Garret (2003)

The effects of financial education in the workplace: evidence from a survey of households

A household survey is used to study the effects of financial education on personal saving.

The study finds that participation in financial education has a positive effect on financial behaviour, in particular savings behaviour.

Supporting Financial Literacy

Duflo and Saez (2003)

The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment

A randomized experiment that examines the impact of information and social interactions on financial behaviour as it relates to retirement plans.

The authors find a significant effect of their treatment on retirement decisions; however they are unable to distinguish between several interpretations of potential causality. While they cannot establish causality unambiguously, it is clear that social interactions ultimately affected decision-making as well.

Ambiguous

Fox, Bartholamae and Lee (2005)

Building the Case for Financial Education

A review of existing literature, and a suggestion of an improved evaluation model.

The authors highlight a number of financial education programs which appear to be successful; however they highlight a lack of adequate evaluation as limiting the availability to draw conclusions.

Ambiguous

Lusardi (2003)

Saving and the Effectiveness of Financial Education

A survey is analyzed to examine financial situations and decisions of households. The impact of attending retirement seminars on savings and wealth accumulation is analyzed.

The author finds that attending a retirement seminar significantly increased wealth and savings among participants. This effect is especially so for those with low levels of education and earnings.

Supporting Financial Literacy

Martin (2007)

A Literature Review on the Effectiveness of Financial Education

A review of the existing literature as it pertains to the effectiveness of financial education.

The author finds a causal connection between financial education (or increases in financial knowledge) and financial behaviour. Specifically, these changes in financial behaviour appear with respect to retirement planning, saving, ownership of homes, and use of credit. Financial education tends to benefit low-income and less-educated households more than wealthier households.

Supporting Financial Literacy

Evidence from studies in emerging markets

Cole et al. performed two large scale studies in Indonesia and India and found that there exists a strong correlation between financial literacy and financial behaviour in these developing countries as well. [17] Specifically, the study finds a strong relationship between financial literacy and the use of bank accounts. The authors note that those with higher levels of financial literacy tend to make better financial decisions which impacts household’s well-being. The correlation between levels of financial literacy and having a bank account was also noted in Africa by Xu and Zia. [18] 

A number of other recent studies have been conducted and some results are beginning to emerge. A select number of these are included in table 3:

Table 3: Select Papers regarding Financial Literacy in the Developing Country Context

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the effect of Financial Literacy

Cai et al. (2011)

Social networks and insurance take up: Evidence from a randomized experiment in China

Randomized experiments across village and households, enabling the estimation of effects of the educational program as well as social network effects.

Social networks have large and significant effects on insurance decision making. A take-away may be that in designing future financial literacy/educational modules they ought to be targeted to village leaders and other influential individuals.

Supporting Financial Literacy

Cai and Song (2011)

Insurance take up in rural China: Learning from hypothetical experience

A participatory insurance game is offered to a randomly selected group of poor households in rural China.

Education and learning significantly increases insurance take-up, by approximately 48% on average. This effect is likely due to the experience learned from the insurance game such as experiencing a simulated disaster.

Supporting Financial Literacy

Cole, Sampson, and Zia (2011)

Prices or Knowledge? What Drives Demand for

Financial Services in Emerging Markets?

Surveys and a field experiment where people are randomly selected to be offered financial literacy education and a small incentive to open a bank account.

A strong correlation is found between the level of financial literacy and certain behaviours. While the correlation is clear, education had a very limited effect on changing behaviour. In particular, it only did so for groups with low education and financial literacy to begin with. A simple subsidy was found to be more effective in increasing demand.

Ambiguous

Dercon et al. (2011)

The demand for insurance under limited credibility: Evidence from Kenya

Development of a model of decision making under limited credibility of financial services sector. A randomized, controlled trial is performed to test implications of the model in Kenya. The experiment also includes financial literacy training delivered via small "study groups" led by a trusted community member.

The results suggest one way to increase demand for insurance is to improve trust and confidence in the enforceability of the insurance contract. The authors find no impacts on insurance demand from financial literacy training.

Not Supporting Financial Literacy

Giné et al. (2011)

Social Networks, Financial Literacy and Index Insurance

Households were grouped into clusters which were then treated with either a high-intensity or low-intensity financial literacy materials in the form of comics, and discount vouchers.

Positive social effects were noted as farmers in high-intensity clusters were significantly more likely to purchase insurance upon receiving an informative comic. Receiving a comic had a negligible impact on farmers in in low-intensity clusters.

Supporting Financial Literacy

Gaurav et al. (2011)

Marketing complex financial products in emerging markets: Evidence from rainfall insurance in India

A financial literacy and insurance education module was given to randomly-selected farmers in India in 2009 to assess impact on rainfall insurance. The training module consisted of both a lecture as well as interactive simulation insurance games.

The module had a significant and positive effect on up take of the insurance, particularly for those with low initial levels of financial literacy.

Supporting Financial Literacy

Link between financial literacy and microinsurance demand

Xu and Zia, undertaking an extensive literature review, find a strong correlation between levels of financial literacy and insurance take-up. [19] In establishing causality, a number of studies have been conducted in this field, often reaching contradictory conclusions. De Bock and Gelade note that while insurance training programs may impart specific knowledge of the products, the ultimate effect on demand remains unclear. [20] This is in line with explanations coming from behavioural economics and psychology: knowledge in and of itself isn’t enough. In order to change behaviour, attitudes need to change and skills need to be acquired.

Financial Literacy Education Programs and Microinsurance Demand

While the efficacy of financial literacy training programs is unclear in general, a number of studies have demonstrated improvements in outcomes. These programs may offer lessons for the design of future programs or at least potential blueprints for further research. One notable lesson which has emerged is that the program’s efficacy appears to depend in part on the product, with demand for more complex products such as index-based crop insurance appearing more responsive to training programs than simpler products such as health insurance. [21] 

Several recent studies emphasize alternative pathways through which training programs influence microinsurance take-up other than through the "rational man" model. Some examples of potential pathways include social networks, [22] trust, [23] attitudes, [24] and other psychological pathways. This represents an interesting development, and an area where further research seems particularly likely to bear fruit.

Generally speaking, existing financial literacy training programs have tended to focus on one of two main approaches – a traditional, taught program, and a participatory based-approach. [25] There is no consensus as to which form of training is better, and a study by Patt et al. found no significant difference between the traditional form of communicating benefits of insurance and playing an interactive game. [26] However, within both types of training apparently effective programs have been run.

Traditional Training Programs

Distributing comics and financial literacy training materials has been found to be effective by several studies. Interestingly, the pathway of treatment does not appear to be simply improved knowledge leading to increased demand. Giné et al. used the intensive distribution of financial literacy comics as a treatment to study the impact on insurance demand. [27] They found this to be effective in increasing demand, provided that farmer’s close contacts were also receiving comics. They nonetheless found a negligible effect of comic distribution if farmer’s close contacts were not receiving these comics, suggesting significant network effects at work.

Olapade and Frölich found that distributing brochures did not improve knowledge of recipients, and actually decreased knowledge of non-recipients, presumably through negative social-transmission effects. [28] However, it did cause an improvement of attitude for both recipients and non-recipients alike in target villages. As of writing, they do not yet have results on the ultimate effect on demand, but given the changes in attitudes it could potentially show increased demand. These results highlight the non-linear pathway through which financial literacy affects behaviour.

Cole et al. conducted an experiment where households were randomly selected to receive a visit from an insurance educator in India. [29] Households that received a visit had significantly increased insurance take-up rates compared to households that only received a flyer about the product. Cai et al. showed improvements in outcomes from longer-duration training. [30] They contrasted the impact of a basic training vs. a more intensive training session in China and observed that attending a longer, more intensive training session increased uptake of insurance. This would suggest that there continues to be a positive marginal effect of education beyond short, one-off sessions.

Radio has also been shown to be an effective and cost-effective way to educate potential clients, suggesting the possibilities of alternative ways to reach potential microinsurance clients. [31] 

While these studies show impacts of traditional training on uptake, Bonan et al. show little to no impact on insurance demand from training. [32] Gaurav et al. find that the impact of financial training varies depending on individual characteristics. [33] Specifically, they show that training is only effective for those who initially have low levels of financial literacy, suggesting that training programs could be targeted here for maximum effect. This is in line with Cole et al. showing similar results for the effect of financial education on the opening of bank accounts. [34] 

Participatory Training Programs

The participatory approach to training has also received research interest. Some studies have shown significant increases in demand from the approach. Cai and Song used a simulated game where farmers were allowed to choose whether to buy insurance or to gamble their incomes by not purchasing insurance as a way of educating the farmers about the risks of adverse weather. [35] From this game, they noted an increase in real insurance take-up of almost 10%. This is in contrast to another group of farmers being told the objective benefits of insurance which did not yield a significant change in purchasing decisions. Similarly, Gaurav et al. found that a two-day educational program, which involved participatory games simulating rainfall insurance had a significant impact on actual rainfall insurance demand. [36] From these studies, it appears that for relatively complex products the participatory approach is well-suited as it may be difficult for potential microinsurance clients to gain a thorough understanding of the product through a traditional, taught approach.

Importance of Social Networks

There is significant evidence of risk sharing within social networks, particularly in rural areas. [37] Social networks have been found to be particularly relevant in insurance information and understanding diffusion. Giné et al. find that social networks play an important role on farmers' decision to purchase drought insurance. [38] They form clusters by grouping together geographically proximate households and randomly assigned distribution of financial literacy materials to assess the direct impact and social network spillovers of providing financial literacy. They find suggestive evidence that financial literacy materials are efficacious in encouraging take-up when farmers' social contacts similarly receive access to financial literacy materials.

Karlan et al. analyzes agricultural insurance in Ghana and finds that demand for insurance in subsequent years is strongly increasing in a farmer’s own receipt of insurance payouts, and with the receipt of payouts by others in the farmer’s social network. [39] This is related to our earlier discussion on trust in peers and networks as well.

Cai et al. demonstrated the impact of social networks on distributing information relating to financial products. [40] They educated villagers about insurance projects by explaining the products and contracts to a subset of households at a village meeting, before going door-to-door after the meeting to attempt to identify social networks. They found that attendance at the meeting increased take-up-rate by approximately 12%, and that this had a significant positive spill-over effect to households that did not attend the meeting. This study emphasized that determining who should receive the information may be important in its overall effectiveness and cost-effectiveness.

In an experiment that seems to confirm these ideas, Giné et al. first intensively educated village opinion leaders on insurance products and then subsequently came back and sold the product. [41] They observed a likely network effect at play as individuals who were better connected to informal village networks had higher uptake rates than others.

However, other experiments have shown that attempts to exploit these network effects can backfire. As discussed earlier, Dercon et al. found in their experiment that a 10% sales referral incentive to influence people to recommend the product to their friends dropped take-up of insurance as there was fear of a potential pyramid scheme. [42] This demonstrates the importance of framing the study in such a way that it takes into account prevailing cultural attitudes and trust levels.

Cost Effectiveness

From a cost-effectiveness and overall efficacy standpoint, utilizing the financial literacy route to influence demand has been called into question. Cole et al. find that while financial education training had a marginal effect on outcomes, using a simple subsidy to influence the outcome (in their case opening a bank account) was 2.5 times more cost effective than working to improve financial literacy. [43] An extensive literature review by Matul et al. found financial literacy training programs to be more expensive than alternative demand strategies, with varied results. [44] Bonan et al. found that educating potential clients about insurance literacy had no impact on end demand, but that a marketing treatment did have a significant impact. [45] The authors suggest one interpretation of these results is that compensation is more effective than education to influence demand.

Conclusions and Future Research

From this emerging body of knowledge several lessons are beginning to crystallize. First, in terms of determinants of microinsurance demand, several factors are key to explaining the relatively low demand for microinsurance to date. These factors are a lack of trust in the product, people and organizations involved, liquidity constraints, price, the influence of social networks, and limited understanding of insurance. Consequently, any interventions or policies aimed at increasing microinsurance demand should take all of these into account.

There are several policy implications of this. Firstly, training programs that are likely to be successful in raising demand should not focus on simply imparting knowledge of the specifics of insurance products. They should rather focus on a broader approach that emphasizes alternative and complementary pathways of behaviour change: that is, they should seek to influence social and psychological dynamics which may lead to changes in attitudes and skills. Combining this with ways to increase trust in the product, people and organizations are also likely to be especially beneficial in increasing demand.

Secondly, baseline levels of financial literacy, insurance product usage, existing risk-sharing mechanisms, and the cultural context should be considered when designing interventions. This can be used to inform both the content and audience of training programs. For example, training programs can be targeted at certain subgroups of the population such as particularly influential and well-connected people to leverage possible network effects, or to sub-groups with low initial levels of financial literacy.

Thirdly, the type of insurance product being marketed should inform the form and content of the training program. Focusing on improving understanding and knowledge of the product itself, for example through a simulated insurance game, is likely to be more effective for a relatively complex and difficult-to-understand product like index-based insurance. Consequently, the nature of the program may focus more on imparting knowledge of the product whereas a program for health insurance may focus less on detailed description of product specifics and more on generating trust, changing attitudes and the practicalities of how and where to seek care.

Lastly, as the mechanisms underpinning demand are beginning to be understood, researchers who undertake further research should target their studies within this theoretical framework. That is, there should be a clear link between experiments, trainings or other interventions and the intended objectives that is based on an underlying theory. [46] Potential interventions can be designed in such a way to enable testing of specific, falsifiable hypotheses. This will allow for more meaningful and useful experimental results as well as contribute to the growing theory of behavioural change in response to financial literacy interventions.

Appendix - Tables

Table 1: Selected Papers Regarding Determinants of Microinsurance Demand

Authors

Paper Title

Research Design

Main Result

Effect

Risk aversion

Giesbert et al. (2011)

Participation in Micro Life Insurance and the Use of Other Financial Services in Ghana

Ghanaian household survey data to examine households’ decisions to take up micro life insurance

and to use other financial services

Risk-averse households are found to be less likely to participate in insurance, suggesting that insurance is considered to be risky

Negative

Giné et al. (2008)

Patterns of Rainfall Insurance Participation in Rural India

Household survey of rainfall insurance product sold to farmers by BASIX

Risk averse households are less likely to buy insurance

Negative

Kouame and Komenan (2012)

Risk Preferences and Demand for Insurance Under Price Uncertainty: An Experimental Approach For Cocoa Farmers In Cote D'Ivoire

Experimental gambling approach to assess farmers’ attitude towards risk examine the determinants of risk aversion for crop price insurance

High level of risk aversion among Ivorian cocoa farmers with more than 45 percent of the households exhibiting severe to extreme risk aversion; high risk aversion inhibit the demand for insurance.

Negative

Trust

Cai et al. (2009)

Microinsurance, Trust and Economic Development: Evidence From A Randomized Natural Field Experiment

Randomized field experiment using government sponsored heavily subsidized insurance in China – working with the government

Lack of trust in government sponsored product is a significant barrier for demand

Positive

Cai and Song (2011)

Insurance Take Up In Rural China: Learning From Hypothetical Experience

Experimental design to test the role of experience and information in insurance take-up in rural China, where weather insurance was a new and highly subsidized product.

Experience acquired in playing the insurance game matters; experience gained through games may also lead to increased trust in the product.

Positive

Cole et al. (2012a)

Barriers to Household Risk Management: Evidence from India

Randomized field experiments of a rainfall insurance product; to isolate effect of trust, during household visits by an insurance educator, they randomize whether the educator is first recommended to the household by a trusted local agent

Results from randomized treatment shows demand is 36 percent higher when the educator is endorsed in this way.

Positive

Dercon et al. (2012)

Health Insurance Participation: Experimental Evidence from Kenya

Field experiment to assess the impact of peer-referrals - members of a pre-existing credit and savings group could reduce costs of membership by signing their peers up for insurance

Negative effect of referral incentive on demand relative to the basic marketing treatment; increased distrust of insurance sales staff may explain lower take up

Positive

Giné et al. (2008)

Patterns of Rainfall Insurance Participation in Rural India

Household survey of rainfall insurance product sold to farmers by BASIX

Insurance take-up depends on the household’s degree of familiarity with the insurance vendor

Positive

Patt et al. (2009)

Making Index Insurance Attractive To Farmers

Experimental games and survey on trust after the game

Through participatory methods, farmers were able to learn how the insurance contract works; they argue that games are also valuable in building trust

Positive

Authors

Paper Title

Research Design

Main Result

Effect

Liquidity constraints

Binswanger and Rosenzweig (1993)

Wealth, Weather Risk and the Profitability of Agricultural Investment

Panel data from rural India on investments, wealth and rainfall

They suggest that the reason why farmers are unable to achieve profit-maximizing portfolios is because they face serious liquidity and credit constraints

Chen et al. (2013)

Smallholder Participation In Hog Insurance And Willingness To Pay For Improved Policies: Evidence From Sichuan Province In China

Randomized treatment with credit vouchers among small scale farmers in China for swine insurance; credit vouchers allowed them to delay insurance premium payment until the end of the insured period;

Insurance purchase increased by 11 percentage points, indicating that allowing farmers to pay the insurance premium later in the insured period indeed increases demand, perhaps partly as a result of liquidity constraints, and partly as a result of trust

Negative

Clarke (2011)

A Theory of Rational Demand for Index Insurance

Theoretical modeling

In the presence of basis risk, even when actuarially-fair index insurance contracts are offered to farmers who are not liquidity constrained, those farmers will not fully insure

No effect

Cole et al. (2012a)

Barriers to Household Risk Management: Evidence from India

Randomized field experiments of a rainfall insurance product, and randomly assign high cash rewards as experiment compensation

Offering farmers with a cash transfer at the same time as offering insurance greatly increases take-up; effect is magnified amongst poor households, which are likely to have less access to credit markets

Negative

Giné et al. (2008)

Patterns of Rainfall Insurance Participation in Rural India

Household survey of rainfall insurance product sold to farmers by BASIX

Take up rates are lower among households that are credit-constrained

Negative

Ito and Kono (2010)

Why is the Take-Up of Microinsurance So Low

Household data collected in Karnataka, India, for health insurance

Relationship between credit constraints and demand for microinsurance is negative but not significant

No effect

Jutting (2003)

Do Community-based Health Insurance Schemes Improve Poor People’s Access to Health Care? Evidence from Rural Senegal

Household survey in rural Senegal

Poor nonmember interested in joining the scheme but have no financial means to pay the required insurance premium

Negative

Karlan et al. (2012)

Agricultural Decisions After Relaxing Credit And Risk Constraints

Randomized experiments in northern Ghana; farmers randomly assigned to receive cash grants, grants or access to purchase rainfall index insurance, or both

They find strong responses of agricultural investment to the rainfall insurance grant, but relatively small effects of the cash grants, suggesting liquidity is not the driving factor, and that price of insurance matters

No effect

Liu and Myers (2012)

The Dynamics of Insurance Demand under Liquidity Constraints and Insurer Default Risk

Dynamic model of agricultural insurance demand by risk-averse farmers who can borrow and lend subject to a liquidity constraint and who face risk of insurer default

Credit constraints reduce the demand for insurance

Negative

Authors

Paper Title

Research Design

Main Result

Effect

Price

Cai et al. (2009)

Microinsurance, Trust and Economic Development: Evidence From A Randomized Natural Field Experiment

Randomized field experiment using government sponsored heavily subsidized insurance in China

Very high effect of subsidized premiums on insurance take up rates - 90 percent take-up when insurance was heavily subsidized by the government

Negative

Cole et al. (2012a)

Barriers to Household Risk Management: Evidence from India

Randomized field experiments in rural India to test adoption of a rainfall insurance product.

Demand is significantly price sensitive, but widespread take-up would not be achieved even if the product offered a payout ratio comparable to U.S. insurance contracts

Negative

Mobarak and Rosenzweig (2012)

Selling Formal Insurance to the Informally Insured

Randomize the offer of and price of index product in India

Demand is very price sensitive: 15% purchase rate at market prices; 22% purchase rate when priced at a 10% discount off of market price; 38% purchase rate with a 50% discount off of market price; and about 60% purchase rate with a 75% discount off of market price

Negative

Patt et al. (2009)

Making Index Insurance Attractive To Farmers

Experimental games and survey on trust after the game

In the games, where liquidity was not an issue, the cost of premiums appeared to be the most important element for farmers, one that could make or break an insurance contract

Negative

Thornton et al. (2010)

Social Security Health Insurance for the Informal Sector in Nicaragua: A Randomized Evaluation

Randomized treatment of price subsidies

Focus group participants indicate preference for lower priced insurance; however, in the treatment, very few subscribers were willing to pay the full price of insurance once subsidies ran out—subsidies may not be an effective means in long run

Negative

Understanding insurance

Giné et al. (2008)

Patterns of Rainfall Insurance Participation in Rural India

Household survey of rainfall insurance product sold to farmers by BASIX

Lack of understanding about the product was the most common explanation cited by households for not purchasing insurance

Positive

Table A1: Financial Literacy and Financial Services

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the Effect of Financial Literacy

Bernheim and Garret (2003)

The effects of financial education in the workplace: evidence from a survey of households

A household survey is used to study the effects of financial education on personal saving.

The study finds that participation in financial education has a positive effect on financial behaviour - in particular savings behaviour.

Supporting Financial Literacy

Cole et al. (2011)

Prices or Knowledge? What Drives Demand for

Financial Services in Emerging Markets?

Surveys and a field experiment where people are randomly selected to be offered financial literacy education and a small incentive to open a bank account - similar to the next study also by Cole et al, but examining whether accounts remained open 2 years after the intervention.

A strong correlation is found between the level of financial literacy and certain behaviours. While the correlation is clear, education had a very limited effect on changing behaviour. In particular, it only did so for groups with low education and financial literacy to begin with. A simple subsidy was found to be more effective in increasing demand.

Ambiguous

Cole et al. (2009)

Financial Literacy, Financial Decisions, and the Demand for Financial Services: Evidence from India and Indonesia

Surveys and a field experiment where people are randomly selected to be offered financial literacy education and a small incentive to open a bank account.

High correlation between financial literacy and use of financial services. No effect of financial literacy training on likelihood to open a bank account on the full sample, but an effect on uneducated and financially illiterate households.

Ambiguous

Duflo and Saez (2003)

The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment

A randomized experiment that examines the impact of information and social interactions on financial behaviour as it relates to retirement plans.

The authors find a significant effect of their treatment on retirement decisions, however they are unable to distinguish between several interpretations of potential causality. While they cannot establish causality unambiguously, it is clear that the informational aspect of the education program was not the only channel - that is that social interactions ultimately affected decision-making as well.

Ambiguous

Holzmann (2010)

Bringing Financial Literacy and Education to Low and Middle Income Countries: The Need to Review, Adjust and Extend Current Wisdom

The paper details a program to be run by the World Bank and proposes basic methodology that focuses on firstly, measuring financial literacy and capability, and secondly on assessing the impact of interventions on these variables of interest.

Proposes best practices with respect to impact evaluations and proposes a standardized definition of financial literacy / capability.

N/A

Fox et al. (2005)

Building the Case for Financial Education

A review of existing literature, and a suggestion of an improved evaluation model.

The authors highlight a number of financial education programs which appear to be successful; however they highlight a lack of adequate evaluation as limiting the availability to draw conclusions.

Ambiguous

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the Effect of Financial Literacy

Gray et al. (2009)

Can Financial Education Change Behaviour? Lessons from Bolivia and Sri Lanka

Microfinance Opportunities created the Global Financial Education Program, or GFEP in conjunction with a number of microfinance institutions around the world. These modules were used around the world and reached approximately 350,000 people.

Financial education, if properly designed and implemented, can improve financial literacy and translate into improved financial behaviours. Specifically, increases were seen with regards to debt management and budgeting, and limited increases with respect to savings behaviour.

Supporting Financial Literacy

Lusardi (2003)

Saving and the Effectiveness of Financial Education

A survey is analyzed to examine financial situations and decisions of households. The impact of attending retirement seminars on savings and wealth accumulation is analyzed.

The author finds that attending a retirement seminar significantly increased wealth and savings among participants. This effect is especially so for those with low levels of education and low earnings.

Supporting Financial Literacy

Martin (2007)

A Literature Review on the Effectiveness of Financial Education

A review of the existing literature as it pertains to the effectiveness of financial education.

The author finds a causal connection between financial education (or increases in financial knowledge) and financial behaviour. Specifically, these changes in financial behaviour appear with respect to retirement planning, saving, ownership of homes, and use of credit. Financial education tends to benefit low-income and less-educated households more than wealthier households.

Supporting Financial Literacy

Table A2: Financial Literacy and Microinsurance

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the Effect of Financial Literacy

Bonan et al. (2011)

Is it all about money? A randomized evaluation of the impact of insurance literacy and marketing treatments on the demand for health microinsurance in Senegal

An insurance literacy module was given to randomly selected sample of households in Thies, Senegal.

The insurance literacy module has no impact, however marketing does significantly impact take up decisions of households.

Not Supporting Financial Litearcy

Cai et al. (2009)

Microinsurance, Trust and Economic

Development: Evidence from a Randomized Natural Field Experiment

Generate exogenous variations in insurance coverage across several hundred villages in China to analyze the impact insurance coverage has.

Farmers refuse to purchase highly subsidized insurance - could be due to lack of awareness of the insurance program, or trust.

N/A: Documenting Low Take-Up

Cai et al. (2011)

Social networks and insurance take up: Evidence from a randomized experiment in China

Randomized experiments across village and households, enabling the estimation of effects of the educational program as well as social network effects.

Social networks have large and significant effects on insurance decision making. A take-away may be that in designing future financial literacy/educational modules they ought to be targeted to village leaders and other influential individuals.

Supporting Financial Literacy

Cai and Song (2011)

Insurance take up in rural China: Learning from hypothetical experience

A participatory insurance game is offered to a randomly selected group of poor households in rural China.

Education and learning significantly increases insurance take-up, by approximately 48% on average. This effect is likely due to the experience learned from the insurance game such as experiencing a simulated disaster.

Supporting Financial Literacy

Carpena et al. (2011)

Unpacking the causal chain of financial literacy

A five-week education module is given in India, and the effects on knowledge, awareness and attitudes are measured.

The module was ineffective in increasing the ability of the participants to perform financial calculation, but was effective in raising awareness of financial matters and in changing attitudes towards financial products.

Ambiguous

Cole et al. (2012a)

Barriers to household risk management: Evidence from India

Two experiments were done. One analyzed the effects of trust, liquidity, and understanding on demand. In the second, various marketing techniques were randomly used to market rainfall microinsurance.

Lack of trust and understanding, limited numeracy and financial literacy, liquidity constraints and limited salience constrain demand. The authors additionally look at the impact of a short insurance education module on demand and determine it has no significant effect on demand.

Not Supporting Financial Literacy

Dercon et al. (2011)

The demand for insurance under limited credibility: Evidence from Kenya

Development of a model of decision making under limited credibility of financial services sector. A randomized, controlled trial is performed to test implications of the model in Kenya. The experiment also includes financial literacy training delivered via small "study groups" led by a trusted community member.

The results suggest one way to increase demand for insurance is to improve trust and confidence in the enforceability of the insurance contract. The authors find no impacts on insurance demand from financial literacy training.

Not Supporting Financial Litearcy

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the Effect of Financial Literacy

Galarza and Carter (2010)

Risk Preferences and demand for insurance in Peru: A field experiment

An experimental farming game was played offering a choice between fall-back project, loan and risky project, and an insured loan.

Offering insurance enabled previously "risk-rationed" individuals to pursue potentially welfare-enhancing projects. Those that did pursue insured insurance were more likely to have higher levels of financial literacy, however the relationship appears to not be causal and instead to be related to risk aversion.

Not Supporting Financial Literacy

Giné et al. (2008)

Patterns of rainfall insurance participation in rural India

The paper gains its data from a 2004 survey after the monsoon season in India.

As it relates to financial literacy, the main results are that participation in village networks and higher measures of familiarity with the insurance vendor are correlated with greater take-up. However, a few surprising results emerged from the paper. Firstly, education is not correlated with insurance take-up decisions. Secondly, more risk averse households are less likely to purchase insurance. The authors postulate this may be due to uncertainty and lack of understanding of the products.

Ambiguous

Giné and Yang (2009)

Insurance, credit and technology adoption: Field experimental evidence from Malawi

In Malawi farmers were randomly selected to be offered a credit package consisting of a crop loan, or a crop loan with actuarially fair microinsurance.

Take-up was significantly lower for farmers offered the credit package with the insurance. The authors postulate this could be due to a pre-existing limited liability default protection.

N/A: Documenting Low Take-Up

Giné et al. (2011)

Social Networks, Financial Literacy and Index Insurance

Households were grouped into clusters which were then treated with either a high-intensity or low-intensity financial literacy materials in the form of comics, and discount vouchers.

Positive social effects were noted as farmers in high-intensity clusters were significantly more likely to purchase insurance upon receiving an informative comic. Receiving a comic had a negligible impact on farmers in in low-intensity clusters.

Supporting Financial Literacy

Gaurav et al. (2011)

Marketing complex financial products in emerging markets: Evidence from rainfall insurance in India

A financial literacy and insurance education module was given to randomly selected farmers in Gujarat, India in 2009 to assess impact on rainfall insurance. The training module consisted of both a non-interactive lecture on personal finance and insurance, as well as interactive simulation insurance games.

The module had a significant and positive effect on up take of the insurance, particularly for those with low initial levels of financial literacy.

Supporting Financial Literacy

Authors

Paper Title

Research Design

Main Result

Supporting or Not Supporting the Effect of Financial Literacy

Karlan et al. (2011)

Crop Price Indemnified Loans for Farmers: A Pilot Experiment in Rural Ghana

In Ghana farmers are randomly assigned to be offered a microfinance loan with or without free, subsidized insurance.

The inclusion of free, subsidized insurance on the loan did not affect the uptake of loan or any other outcomes of interest.

N/A: Documenting Low Take-Up

McPeak et al. (2010)

Explaining index-based livestock

insurance to pastoralists

An experimental game was played in Kenya with pastoralists to increase awareness and understanding of index-based microinusrance.

While the study focuses on decisions taken by pastoralists within the game, the authors believed the game to be successful in explaining the concept of insurance. They are following up the effects of the game on actual purchase decisions from a recently-launched index-based insurance product.

Ambiguous

Matul et al. (2013)

Why People Do Not Buy Microinsurance and What We Can Do About It

Literature review

The impact of training programs is supported by a number of studies, and contradicted by others. While the overall impact of training is unclear, some interesting distinctions emerge. For one, it appears that financial literacy training may have a greater impact for index-based microinsurance than for health microinsurance.

Ambiguous

Olapade and Frölich (2012)

The Impact of Insurance Literacy Education

on Knowledge, Attitude and Behaviour - A

Randomized Controlled Trial

A randomized controlled trial of insurance education in the rural Philippines. The education treatment consists of a brochure given out to the general public in treated areas.

Unintended negative social network effects appear to cause a decrease of insurance knowledge due to information diffusion among non-recipients of brochure. The campaign had a positive effect on attitude towards insurance for both treated households and non-treated households influenced by network effects. An area for further study is to see what impact this change in attitudes has in behaviour.

Ambiguous - unchanged for treated groups, negative for untreated groups

Patt et al. (2010)

How do smallholder farmers understand insurance, and how much do they want it? Evidence from Africa

A randomized experiment in Ethiopia and Malawi comparing conventional treatment to an interactive insurance game.

Training through role-playing simulation games may be an important tool to improve understanding of insurance, however it is unclear whether it out-performs conventional training approaches.

Supporting Financial Literacy

Tower and McGuiness (2011)

A friend indeed: An evaluation of an insurance education radio campaign in Kenya

An evaluation of a radio education campaign in Kenya. The evaluation is performed by analyzing quantitative and qualitative data.

The radio campaign improved various aspects of understanding of insurance. This implies that exposure to basic insurance terms increased awareness and is an effective tool for encouraging behaviour change.

Supporting Financial Literacy