The willingness to pay for flood insurance in mekong river delta

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLINGN ESS TO PAY FOR FLOOD INSURANC E IN THE MEKONG RIVER DELTA BY NGUYE N NGOC QUE ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, SEPTEMBE R 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLI NGNES S TO PAY FOR FLOOD INSUR ANCE IN THE MEKO NG RIVER DELTA A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN NGOC QUE ANH Academic Supervisor: TRUONG DANG THUY HO CHI MINH CITY, September 2016 DECLARATION In order to fulfill the requirements for the degree of Master of Art in Development Economics to Vietnam – The Netherlands Programme (VNP), this thesis entitled “Willingness to pay for Flood Insurance in the Mekong River Delta” is submitted This declaration certify that this thesis constitutes on my original work only All materials used in this thesis have been acknowledged and cited properly following the Programme’s standards NGUYEN NGOC QUE ANH ACKNOWLEDGMENTS Doing thesis is an amazing adventure but it is also a tough path, without support and encouragement of my family, my teachers, my friends and Vietnam Netherland Program, I might not complete it I would like to send my sincerest thanks and gratitude to my supervisor - Dr Truong Dang Thuy who always gives me invaluable advice and instructs me wholeheartedly From the initial ideas to finish, he is very patient, listens to my opinions and helps me to correct mistakes delicately I am deeply grateful to Mr Phung Thanh Binh Many thanks for giving me the precious opportunity to join in this research, inspiring me and allowing me to employ the data, so that I can pursue this topic Memories and experience from this research will be unforgettable I greatly appreciate the enthusiasm and kindness of lecturers and staffs of Vietnam Netherland Program I would like to thank my teachers, the founders and staffs of VNP for be willing to help and give me invaluable knowledge Last but not least, I am very thankful that my family and my friends are always with me, love me and support me wholeheartedly From the bottom of my heart, I would send my sincerest gratitude to my parents Without their love, this thesis would be not accomplished NGUYEN NGOC QUE ANH ABSTRACT In the circumstance of climate change and series of dams built in Mekong River Basin, risk of flood damages and productivity loss in Mekong River Delta tend to be ambiguous and unpredictable Choice experiment is applied to assess the stated preference and the willingness to pay for flood insurance of local farmers Based on the data obtained from survey in Mekong River Delta, we consider the impacts of attributes on the utility of insurance buyer and the willingness to pay of them As a result, flood insurance attributes except deductible have impact on utility of farmers and the willingness to pay for flood insurance of them Especially, buying the flood insurance provided by corporation will raise the utility and willingness to pay of local farmer Since the deductible have no impact on the utility of flood insurance buyers, local farmers are willing to share the burden with providers When the effects of challenges for flood insurance development are controlled, only provider and policy types have strong positive impact on utility of insurance Based on the estimate result, WTP for attributes and the WTP for specific insurance package are calculated carefully, we also evaluate the probability of levels of WTP for flood insurance with different levels of important attributes The potential development of insurance companies are very bright, especially corporation The profitability will be large, if the provider provide insurance packages with favorite policy When premium of the most preferred flood insurance 2 vary from 5,000 (VND/1000 / Farming season) to 200,000 (VND/1000 / Farming season), 90 percent to 79 percent of farmer willing to pay it JEL Classification: Q11, Q12, Q14 Keywords: Willingness to pay, Flood insurance, Mekong River Delta, Random Utility Model i TABLE OF CO ABSTRACT ABBREVIATIONS LIST OF FIGURES LIST OF TABLES CHAPTER INTRODUCTION 1.1 Problem statement 1.2 Research objectives 1.3 Scope of the study 1.4 Structure of this thesis CHAPTER LITERATURE REVIEW 2.1 Previous studies without using RUM 2.1.1 Researches on agricultural insurance using s data 2.1.2 2.2 Researches not applying RUM on agricultura Random utility model (RUM) and applications 2.2.1 Random utility model (RUM) 2.2.2 Researches applying RUM on agricultural in 2.2.3 Review of flood insurance demand research u 2.3 Challenges of disaster insurance market ii 2.3.1The ambiguity 2.3.2Adverse selection 2.3.3Charity hazard CHAPTER RESEARCH METHODOLOGY 3.1Demand for flood insurance 3.2The advantages of Choice Experiment compared to Contingent Value M 3.3General model 3.4Estimation 3.4.1Exogenous sample 3.4.2Estimation on Subset of Alternatives 3.5Description of variables 3.5.1Description of all attributes and levels 3.5.2Description of variables used to capture cha development 3.6Empirical models 3.6.1Empirical model with only attribute variabl 3.6.2Empirical model with attribute variables an variables 3.7Calculation of Willingness-to-Pay (WTP) for specific insurance packag of buying specify insurance packages with the changes in premium 3.7.1Calculation of Willingness to Pay (WTP) fo packages 3.7.2Probability of buying specify insurance pac 3.8Data collection iii CHAPTER RESEARCH RESULTS 4.1Descriptive statistics 4.2Bivariate analysis 4.2.1No selection without consideration 4.2.2Bivariate analysis about the effects of person insurance purchasing decision 4.3Empirical results 4.3.1Estimation results 4.3.2The willingness to pay (WTP) 4.3.3The probability of willingness to pay of most CHAPTER CONCLUSION 5.1Conclusion remark 5.2Policy implications 5.3 Limitations REFERENCES APPENDIX APPENDIX A: Questions are used from the survey APPENDIX B: Conceptual Framework Appendix C: The statistic results about impacts of challenges Appendix D: The variation of WTP for flood insurance probability, with difference levels of cover iv Irrigation Improvement 97 Accessibility to pumping station 98 Fear 99 Charity hazard 100 Appendix D: The variation of WTP for flood insurance probability, with difference levels of cover Table: With different levels of coverage, the probability of WTP for flood insurance packages Table: The probability of WTP, when the challenges are controlled 101 Appendix E: The variation of WTP for flood insurance probability, with difference levels of deductible rate Table: With different levels of deductibles, the probability of WTP for flood insurance packages Table: the probability of WTP, when the challenges are controlled 102 Appendix F: the regression result of models controlling the impacts of challenges and household characteristics Variables Policy Flood Flood&Innudation Flood&Windstorm Flood&Innudation&Windstorm Provider Corporation Foreign Deductibles (%) Cover (VND/1000 / Farming season) Premium (VND/1000 2/ Farming season) Premium.charityhazard (VND/1000 / Farming season) Policy1 Charityhazard Policy2 charityhazard Policy3 charityhazard Policy4 charityhazard Premium.Fear (VND/1000 / Farming season) Policy1.Fear Policy2.Fear 103 Policy3.Fear Policy4.Fear Premium.Vulnerability (VND/1000 / Farming season) Policy1.Vulnerability Policy2.Vulnerability Policy3.Vulnerability Policy4.Vulnerability Premium.Irrigation (VND/1000 / Farming season) Policy1.Irrigation Policy2.Irrigation Policy3.Irrigation Policy4.Irrigation Premium.Pumpingstation (VND/1000 / Farming season) Policy1.Pumpingstation Policy2.Pumpingstation Policy3.Pumpingstation Policy4.Pumpingstation Premium.Totalincome Premium.Age Premium.Familymembers No Obs LR Chi-sq 104 Appendix G: The regression result in Stata of models Figure: The regression result of basic model based on the whole sample 105 Figure: The regression result of basic model based on the whole sample with the impact of challenges for the development of flood insurance market 106 Figure: The regression result of basic model based on the sample of observations whose tastes are consistent 107 Figure: The regression result of basic model based on the whole sample with the impact of challenges for the development of flood insurance market 108 Appendix H: The regression result are obtained from applying Nested Logit Model in Stata 109 110 ... conducted to capture the demand of flood insurance in Mekong River Delta Overall, facilitating the disaster insurance sector in developing countries like Vietnam is necessary The information about the. .. buyer and the willingness to pay of them As a result, flood insurance attributes except deductible have impact on utility of farmers and the willingness to pay for flood insurance of them Especially,... preference and the willingness to pay for flood insurance of local farmers Based on the data obtained from survey in Mekong River Delta, we consider the impacts of attributes on the utility of insurance