SELLING FORMAL INSURANCE TO THE INFORMALLY INSURED: TRI-STATE WEATHER INSURANCE PROJECT

Principal Investigators: Mushfiq Mobarak (Yale U.), Mark Rosenzweig (Yale U.)
Research Team: Sushmita V Gopalan, Thomas van den Aarssen
LEAD Centre: Centre for Microfinance (CMF)
Focus Area: Insurance & Pensions
Project Geography: Tamil Nadu, Uttar Pradesh, Andhra Pradesh
Partner: AIC (Agriculture Insurance Company of India)
Status: Ongoing

Background:

In this study spanning three states, researchers seek to understand why Indian farmers who are exposed to risks of volatile rainfall patterns are reluctant to purchase formal insurance products that might help reduce their exposure to these risks. Rainfall insurance, an innovative product designed to protect farmers against weather fluctuations, pays out in cases of excess or deficit rainfall. For the core part of the study, researchers marketed rainfall index insurance using different approaches to numerous subcaste communities.

The study aims to answer the following questions: (a) Is rainfall insurance a ‘missing market’, or are farmers already fully covered by informal mechanisms?; (b) Is there a significant lack of trust in the insurance system?; (c) How important are liquidity constrains in preventing market development and can subsidies encourage such transactions?; (d) What are the consequences of purchasing/not purchasing insurance on household investment decisions and income strategies (ex: planting decisions, agricultural inputs, labour migrations, etc).

This study adopts an innovative approach by using natural variation in levels of access to informal insurance (due to membership in sub-caste risk-sharing networks) with designed variation in price and marketing approach. By marketing to farmers of numerous sub-castes, researchers will be able to test the hypothesis that farmers who are informally insured through their caste networks will demand less formal insurance at all price points, and that they will also be more price-sensitive compared to those who are less informally-insured. Researchers will also test whether liquidity constraints, complexity of the insurance product, or lack of trust in insurance explain low take-up rates.

Related Resources
WORKING PAPER : Selling Formal Insurance to the Informally Insured
POLICY MEMO : Index-Based Weather Insurance – Exploring Demand and Take-up