Background Risk of Food Insecurity and Insurance Behaviour: Evidence from the West Bank

This paper explores behavioural changes resulting from the presence of a background risk. Due to markets incompleteness, not all risks are insurable. The literature suggests that, according to the structure of preferences, agents bearing a background uninsurable risk are less willing to bear other insurable risks and increase their demand for insurance. The empirical evidence of this effect is limited and, despite the relevance of this question, unexplored in developing countries. This paper fills this gap. It explores the effect of a background risk on the decision to buy health insurance using household data from the Palestinian Territories. We consider the risk of food insecurity as a background uninsurable risk. Using a bivariate probit model, we find that the propensity to buy health insurance is positively affected by the presence of a background risk of food insecurity. When allowing the background risk to vary in intensity, we find that the propensity to insure is higher as the background risk becomes more intense. These results are robust to alternative indicators of background risk. The study shows that, in presence of background risks, there might be incentive changes towards the desirability of insurance that have implications for policy design.