Marketing Complex Financial Products in Emerging Markets: Evidence from Rainfall Insurance in India

This study evaluates the impact of financial literacy training on take-up of index-based rainfall insurance products.

Background

Development practitioners and governments across the world have demonstrated a keen interest in crop insurance as a powerful risk mitigation and risk coping mechanism for the developing world’s agricultural households. Index-based rainfall insurance is an innovative financial product which could help households mitigate the adverse effects of irregular, excessive or deficit rainfall. Index-based policies are structured such that pay-outs are dependent on factors that affect rainfall rather than yield, helping solve incentive problems common to standard crop insurance. Despite its advantages, take-up for the product has been relatively low, possibly due to low financial literacy. This project attempts to gauge whether providing financial literacy training and innovative marketing on rainfall insurance to agricultural households influences their purchasing decisions.

Approach

The project is based on a sample of 600 households from 15 villages in three coastal districts of Gujarat – Amreli, Bharuch and Bhavnagar. Researchers partnered with an NGO, the Development Support Centre, which helps market rainfall policies underwritten by the Agricultural Insurance Company of India. 300 out of the 600 households were randomly assigned to a financial literacy treatment – a pre-marketing financial literacy training held in their village. The financial literacy intervention took the form of village-level lessons conducted by two researcher-trained DSC workers. It consisted of general lessons on personal financial management, savings, credit management and insurance with the help of customized and interactive materials. The rest of the sample households constituted the control group – they received no intervention. After the financial literacy treatment sessions were held in the villages, researchers administered six other independent sub-treatments to groups of 47 farmers each.

These six treatments were as follows:

  1.  A money-back guarantee for the insurance product which guaranteed the household a refund of the full premium amount in case the policy did not pay out.
  2. Weather forecasts about the quality of upcoming monsoons.
  3. A demonstration of the relationship between millimetres of rainfall and soil moisture.
  4. A money–back guarantee, weather forecasts and ‘mm’ demonstration.
  5. ‘Mm’ demonstration and weather forecasts.
  6. Money-back guarantee and weather forecasts.

Key Findings

Researchers found the financial literacy training the most effective of all the treatments offered, leading to an almost 8% increase in take-up. Surprisingly, the money-back guarantee had a limited effect on take-up when it was offered in isolation, while the other marketing treatments had little or no significant impact. These results reinforce the view that individuals educated in financial literacy and insurance are significantly more likely to purchase insurance, suggesting policymakers can use information campaigns to influence take-up of rainfall insurance. While the other treatments were found to be largely ineffective in isolation, a treatment combing all three interventions had substantial effects on take-up.

Implications

Substantial increases in the efficiency of delivery are necessary before rainfall insurance can become a financially sustainable product. Randomized experiments can be used to test theories of consumer demand and to assess the cost effectiveness of different marketing programs. Thus, researchers could conduct similar studies to help develop a coherent theory of how financial literacy improves financial decision making.

Thematic area

Financial Inclusion

Project Leads

Shawn Cole, Sarthak Gaurav, Jeremy Tobacman

Location

Gujarat

Partners

Agricultural Insurance Company of India (AIC), Self Employed Women's Association (SEWA), National Bank for Agriculture and Rural Development (NABARD)

Status

Completed