UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLINGNESS TO PAY FOR FLOOD INSURANCE IN THE MEKONG RIVER DELTA BY NGUYEN NGOC QUE ANH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, SEPTEMBER 2016 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS WILLINGNESS TO PAY FOR FLOOD INSURANCE IN THE MEKONG 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 TIEU LUAN MOI download : skknchat@gmail.com 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 TIEU LUAN MOI download : skknchat@gmail.com 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 TIEU LUAN MOI download : skknchat@gmail.com 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 vary from 5,000 (VND/1000𝑚2 / Farming season) to 200,000 (VND/1000𝑚2 / 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 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENT ABSTRACT. vi LIST OF FIGURES.
vii LIST OF TABLES. ix CHAPTER 1 INTRODUCTION .3 Scope of the study .4 Structure of this thesis. 7 CHAPTER 2 LITERATURE REVIEW.1 Previous studies without using RUM.1 Researches on agricultural insurance using secondary data or combine with primary data .2 Researches not applying RUM on agricultural insurance using primary data .2 Random utility model (RUM) and applications .1 Random utility model (RUM) .2 Researches applying RUM on agricultural insurance .3 Review of flood insurance demand research using RUM .3 Challenges of disaster insurance market. 21 ii TIEU LUAN MOI download : skknchat@gmail.
25 CHAPTER 3 RESEARCH METHODOLOGY .1 Demand for flood insurance .2 The advantages of Choice Experiment compared to Contingent Value Method .2 Estimation on Subset of Alternatives .5 Description of variables .1 Description of all attributes and levels .2 Description of variables used to capture challenges for flood insurance market development .1 Empirical model with only attribute variables .2 Empirical model with attribute variables and their interaction with non-attribute variables .7 Calculation of Willingness-to-Pay (WTP) for specific insurance packages, and probability of buying specify insurance packages with the changes in premium .1 Calculation of Willingness to Pay (WTP) for each attribute and for specific insurance packages .2 Probability of buying specify insurance packages with changes in premium levels. 47 iii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 4 RESEARCH RESULTS .1 No selection without consideration .2 Bivariate analysis about the effects of personal perspectives and externalities on flood insurance purchasing decision.2 The willingness to pay (WTP) .3 The probability of willingness to pay of most preferred insurance packages. 92 APPENDIX A: Questions are used from the survey. 92 APPENDIX B: Conceptual Framework.
94 Appendix C: The statistic results about impacts of challenges. 95 Appendix D: The variation of WTP for flood insurance probability, with difference levels of cover. 100 iv TIEU LUAN MOI download : skknchat@gmail.com Appendix E: The variation of WTP for flood insurance probability, with difference levels of deductible rate. 101 Appendix F: the regression result of models controlling the impacts of challenges and household characteristics.
102 Appendix G: The regression result in Stata of models. 104 Appendix H: The regression result from applying Nested Logit Model in Stata. 108 v TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS BDT Bangladeshi Taka CE Choice Experiment CLL Conditional Log Likelihood Function CVM Contingent Value Method GIS Geographic Information System IFRC International Federation Red Cross IPCC The Intergovernmental Panel on Climate Change LL Log Likelihood Function MRD Mekong River Delta MRC Mekong River Commission OLS Ordinary Least Squares RUM Random Utility Model VND The Vietnamese Dong USD The United States Dollar WTP Willingness to Pay vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1.1 Flood damages in the Mekong River Delta from 1990s to 2000s .2 Disbursement process of IFRC funding contribution for Floods in MRD .1 One choice card are used in the survey .1 Statistical result of percentage of policy types chosen .2 Statistical result of percentage of providers chosen .3 Statistical result of percentage of deductibles rates chosen .4 Statistical result of percentage of cover level chosen .5 Statistical result of percentage of premium levels chosen .6 Statistic results of the most interested attribute of farmers .7 Percentages of observations choosing to purchase flood insurance .8 Amount of observations divided according to respondents’ perception .9 Probability of WTP for flood insurance covering triple disaster damages.10 Probability of WTP after controlling impacts of challenges .11 Probability of buying flood insurance covering flood & inundation damages .12 Probability of WTP for flood insurance covering flood and windstorm damages .13 Probability of WTP for flood insurance packages provided by corporation .14 Probability of WTP after controlling impacts of challenges .15 Probability of WTP for flood insurance provided by foreign company .16 Probability of WTP for flood insurance provided by private company. 79 vii TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.1 Attributes in the insurance package in Nganje’s study .2 Attributes of flood insurance package and their levels in previous study .1 Attributes of flood insurance packages .2 Variables used to capture impacts of challenges for flood insurance development .3 Interactions between perceptive about flood insurance challenges and attributes.4 Insurance packages are used to calculate the WTP.1 Amount of observations choosing alternatives in each order of choice cards .2 Estimate result of models .3 WTP (VND/1000 𝑚2 / Farming season) for each levels of attributes .4 WTP (VND/1000 𝑚2 /Farming season) for specific insurance packages.
70 viii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 INTRODUCTION 1.1 Problem statement Natural disasters have been causing many losses of human life and property including direct damage and indirect damage. The frequency of disasters is increasing together with climate change. In the announcement of IPCC in 2007, since 1900 climate change has caused the increases in global temperatures (roughly 0.76 𝑜𝐶 ) and sea level (approximately 20 centimeters). Along with climate change, the damages caused by natural disasters are increasing gradually over time and tend to be more serious in regions that are prone to be affected by calamities (Pielke et al.
Mekong River Delta, located in downstream the Mekong River Basin, have been experiencing seasonal floods due to great flow rates in the wet season (more than 65,000 𝑚3 /s) and low terrain. According to the Vietnam Academy for Water Resources, from 1991 to 2009, annual floods have caused damaged areas to increase from 1.6 million to 2 million hectares (To & Tang, 2011). Annually, before the flood season, the local residents have carefully preparation to reduce the flood damage. According Vietnam Mekong River Delta Project for enhancing resistance to flood for poor households in 2011 with the support of United Nation, local government and residents reinforced houses, had careful examinations of flood protection infrastructures, practiced aid and provided necessary medicine for prioritized targets based on prudent plans.
Despite of these careful preparations, the 2011 flood caused more than 1,000 billion VND in property damage, 27,000 hectares area of rice and vegetables are damaged in which 10,000 hectares damaged 100%, nearly 12.000 ha of fruit area also flooded. The statistical data of flood damage in the Mekong River Delta from 1990s to 2000s shows that flood damages in downstream Mekong River Delta become abnormal. 1 TIEU LUAN MOI download : skknchat@gmail.1 Flood damages in the Mekong River Delta from 1990s to 2000s Source: Collect from Nguyen, 2006; Dao & Bui, 2009; MRC, 2011; MRC, 2012 Recovery after floods in Mekong River Delta residents takes a long time. This is partly due to the dependence on the aids from government and humanitarian organizations.
In reality, the source of aids is unstable, and people should not completely rely on them. In 2011, the severe flood happened, local residents had to wait at least one year for entire of the aids from International Federation Red Cross. 2 TIEU LUAN MOI download : skknchat@gmail.2 Disbursement process of IFRC funding contribution for Floods in MRD Source: Report of International Federation Red Cross, 2013 In agricultural production, the post-flood relief cannot fully compensate for the costs of agriculture, because farmers in the Mekong Delta invested heavily in their farms with an average of 15 million dong per hectare. Thus, even if the government doubled the level of post-disaster subsidy for local farmers to 5millions dong per hectare paddy after the severe flood in 2011, the new subsidy level only offset against 30% of agricultural cost invested (Ngoc Anh, 2011).