Background risk of food insecurity and insurance behaviour: Evidence from the West Bank

This paper explores behavioural changes resulting from the presence of a uninsurable background risk. Due to markets incompleteness, not all risks are insurable. We empirically test the theory (and the intuition) suggesting that people bearing an uninsurable background risk are less willing to bear other insurable risks and therefore increase their demand for insurance against insurable risks. We present a case study on the Palestinian Territories. We consider the implications of a background risk of food insecurity, a major formally uninsurable risk, using nationally representative household data. Using a bivariate probit model, we find that exposure to severe food insecurity risk increases the propensity to insure against health risks, and this propensity is increasing in background risk intensity. Our findings point to possible incentive changes towards the desirability of insurance that have implications for policy design. (C) 2013 Elsevier Ltd. All rights reserved.