Insuring without insurance

When crisis strikes, how do you cope when there are no insurance markets for you to insurance against loss in? A new paper by Futoshi Yamauchi, Yisehac Yohannes and Agnes Quisumbing tries to answer the question by looking at disasters in Bangladesh, Ethiopia and Malawi. What they find is that individuals with better nutrition and human capital fare better. This is a form of self-insurance via investment in biological assets rather than financial assets. Having good nutrition and health allows you to make it physically through times of crisis. Education allows for the transfer of wealth through time and this is wealth you cannot lose to a disaster and it is very portable should you have to move.

The paper's abstract reads

This paper examines the impacts of disasters on dynamic human capital production using panel data from Bangladesh, Ethiopia, and Malawi. The empirical results show that the accumulation of biological human capital prior to disasters helps children maintain investments in the post-disaster period. Biological human capital formed in early childhood (long-term nutritional status) plays a role of insurance with resilience to disasters by protecting schooling investment and outcomes, although disasters have negative impacts on investment. In Bangladesh, children with more biological human capital are less affected by the adverse effects of floods, and the rate of investment increases with the initial human capital stock in the post-disaster recovery process. In Ethiopia and Malawi, where droughts are rather frequent, exposure to highly frequent droughts in some cases reduces schooling investment but the negative impacts are larger among children embodying less biological human capital. Asset holdings prior to the disasters, especially the household's stock of intellectual human capital, also helps maintain schooling investments at least to the same degree as the stock of human capital accumulated in children prior to the disasters.

(HT: Economic Logic)