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Patterns of Rainfall Insurance Participation in Rural India

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This paper studies in detail a particular rainfall insurance product developed by the insurance firm ICICI Lombard1, which has been offered in recent years to smallholder farmers in the Andhra Pradesh region of southern India. The product provides a return based on rainfall during three separate phases of the Kharif, or monsoon season, and is inexpensive enough to be accessible to farmers of modest income (the cost for one policy covering all three phases of the Kharif is around Rs 200-300, equivalent to $5-6US). The product is sold to farmers by BASIX, a microfinance institution, and rainfall risk is underwritten by ICICI Lombard.

The paper is organised as follows:

  • Section 2 discusses the costs and benefits of index insurance.
  • Section 3 describes the contract features of rainfall insurance product, and related institutional details.
  • Section 4 discusses theoretical literature about the determinants of insurance participation and states the hypotheses to be tested.
  • Section 5 discusses the survey that was conducted and presents summary statistics.
  • Section 6 presents the empirical results on the determinants of insurance participation.
  • Section 7 concludes and discusses future research directions.

The study’s ‘benchmark’ model of insurance participation hypothesised that in a simple setting without asymmetric information, a household’s willingness-to-pay for a given insurance contract will (i) increase with the household’s risk aversion, (ii) increase with the expected payout on the insurance, (iii) increase with the size of the insured risk, and (iv) decrease with basis risk (i.e. the potential mismatch between insurance payouts and actual losses which is particularly significant with index insurance).

The authors found some evidence consistent with the basis risk prediction; namely households who planted a large proportion of castor and groundnut, the two crops insured under the program were more likely to purchase insurance. They also found that take-up rates were higher amongst wealthy households, and lower amongst households who appear to be credit constrained. These findings are consistent with a simple extension of the ‘benchmark’ model to include borrowing constraints. However, they found that risk-averse households were somewhat less likely to take up rainfall insurance, not more likely as the benchmark model suggested. This result was most pronounced amongst households who were less familiar with the insurance provider, BASIX, or did not use other types of insurance.

These finding suggest that many households may be uncertain about the insurance product itself, leading risk-averse households, households with for whom evaluating new technologies is costly, and households who place less trust in the insurance provider, to avoid purchasing insurance. This finding is consistent with qualitative evidence: lack of understanding about the product was the most commonly cited explanation for not purchasing insurance, cited with 25 per cent frequency amongst non-purchasing households.

This paper, which is still a draft working document, represents a preliminary step towards documenting the features of ‘real world’ micro-insurance contracts, and understanding the barriers to increased take-up of insurance in developing countries. So far, the insurance product studied has not been entirely successful in reaching poor, constrained, vulnerable households who stand to benefit most from protection against deficient rainfall.

  • Resource type
  • Author X. Gine; R. Townsend; J. Vickery
  • Year of Publication2007
  • Region
  • LanguageEnglish
  • Number of pages55 pp.

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