The behavioral effects of index insurance in fisheries

TL;DR

This paper models how index insurance influences fisher behavior, showing it can either increase or decrease harvests depending on risk mitigation strategies and contract design, with significant implications for overfishing.

Contribution

It provides the first theoretical framework predicting fisher behavior changes due to index insurance, incorporating multiple risk sources and flexible production models.

Findings

Index insurance can lead to 10% increase or 2% decrease in harvests.

Protection of extraction risks may cause 6-20% increase in harvest.

Behavioral responses depend on risk mitigation and contract design.

Abstract

Fisheries are vulnerable to environmental shocks that impact stock health and fisher income. Index insurance is a promising financial tool to protect fishers from environmental risk. However, insurance may change fisher's behavior. It is imperative to understand the direction fishers change their behavior before implementing new policies as fisheries are vulnerable to overfishing. We provide the first theoretical application of index insurance on fisher's behavior change to predict if index insurance will incentivize higher or lower harvests in unregulated settings. We find that using traditional fishery models with production variability only originating through stock abundance leads fishers to increase harvest with index insurance. However, fishers are adaptable and experience multiple sources of risk. Using a more flexible specification of production shows that index insurance could raise or lower harvest depending on the risk mitigation strategies available for fishers and the design of the insurance contract. We demonstrate the magnitude of potential change by simulating from parameters estimated for three Norwegian fisheries. Fisheries with index insurance contracts protecting extraction risks may increase harvest by 10% or decrease by 2% depending on the risk effects of inputs. Insurance contracts protecting stock risk will lead to 6-20% increases in harvest. Before widespread adoption, careful consideration must be given to how index insurance will incentivize or disincentivize overfishing.