Index Insurance to Manage Weather Risk – A Long-term Experiment in Gujarat

This study involved a systematic review of the available empirical evidence on weather indexed insurance, to identify research priorities and inform policy action.

Background
In India, most farmers with small holdings rely on informal mechanisms for risk management, which tend to be unreliable in events of extreme weather patterns. Anticipating such risks, some farmers adopt risk averse strategies which involve sowing low-risk and lower-yield crops, locking them into a cycle of low revenues. Weather indexed micro-insurance has the potential to be a cost-effective mechanism to protect farmers from adverse weather risks and encourage them to show more faith towards high-yield crops, move out of subsistence farming and increase market participation. This study report is a review of available empirical evidence on weather indexed insurance, with the view to identify guidelines that support weather based micro-insurance schemes.
Approach
This report consisted of a systematic review of thirteen studies, of which eleven examined determinants of take up, while two evaluated the impact of access to insurance. This study uses a series of randomized field experiments to test the importance of price and non-price factors in the adoption of an innovative rainfall insurance product, designed to hedge a major source of agricultural production risk. The insurance product, our brief evaluates is marketed and distributed by the Self Employed Women’s Association (SEWA).

Key Findings

The study found that combining efforts to market weather indexed insurance with policies focused on improving financial literacy and addressing liquidity constraints are likely to increase take-up. In addition, there might be a case for combining the weather indexed insurance product with credit; savings or group liability products to improve take-up and future research efforts should consider constructing parallel experiments that test the impact of such combinations. The very limited evidence available indicates that the impact of the product on smallholder’s ability to manage weather related risks does improve.

Implications
Insights from this systematic review will enrich the understanding of the demand curve for weather insurance, as well as the degree to which previous experience with the product, and previous experimental manipulations, affect demand.  Half of the studies in the review examine hypothetical contracts, that were not marketed in the field. Notwithstanding their value in providing insights into factors that affect take up, future research needs to be focused on the implications of real world insurance products.

Thematic area

Financial Inclusion

Project Leads

Shawn Cole, Jeremy Tobacman, Peta Topalova, Raghab Chattopadhyay

Location

Gujarat

Partners

Self Employed Women’s Association (SEWA)

Status

Completed