Insurance versus Savings for the Poor:Why One Should Offer Either Both or None

This paper analyzes data from a novel field experiment designed to test the impact of twodifferent insurance products and a secret saving device on solidarity in risk-sharing groupsamong rural villagers in the Philippines. Risk is simulated by a lottery. Risk-sharing ispossible in solidarity groups of three and insurance is introduced via less risky lotteries. Ourmain hypothesis is that formal market-based products lead to lower voluntary transfersamong network members. We also test for the persistence of this crowding-out of solidarity.We find evidence for a reduction of solidarity by insurance if shocks are observable.Depending on insurance design, there is also evidence for persistence of this effect even ifinsurance is removed. Simulations using our regression results show that the benefits ofinsurance are completely offset by the reduction in transfers. However, if secret saving ispossible solidarity is very low in general and there is no crowding out effect of insurance. Thissuggests that introducing formal insurance is not as effective as it is hoped for when themonetary situation can be closely monitored, but that it might be a very importantcomplement when savings inhibit observing financial resources. The implication for policy isthat microsavings should be offered simultaneously with microinsurance.....