ACDE PhD seminar: The role of economic preferences and trust in index-based flood insurance: Evidence from Peru

Jose Cobian-Alvarez, PhD candidate from the Arndt-Corden Department of Economics at the ANU Crawford School of Public Policy, presents his research examining how economic preferences and trust impact the adoption of index-based flood insurance in Peru.

Index insurance offers an innovative risk management solution for communities vulnerable to weather-related disasters. This risk transfer product shows significant promise for promoting sustainable development, especially by enhancing resilience to flood shocks in megacities. Using data from an in-field experiment in three urban villages in Lima, Peru, we explore how economic preferences shape the uptake of hypothetical flood insurance. Findings indicate that demand increases with patience but decreases with risk aversion, as impatient households are less likely to insure when liquidity is constrained. Exploring the mechanisms behind these effects, low trust in insurance providers and local government discourages adoption among those who are extremely risk-averse. By fostering trust in flood mitigation efforts and offering targeted subsidies, policymakers can encourage the sustained adoption of index insurance in vulnerable urban communities.