This study evaluates the potential of a weather index insurance product in addressing the insurance requirements of smallholder farmers.
The inherent risks of weather induced crop failure often deter farmers from investing in profitable technologies. Anticipating these risks, some farmers employ low return, low risk production strategies locking themselves into a poverty trap. As a result, risk alleviation technologies such as crop insurance have been identified as a potential catalyst for farmer’s adoption. Yet in many cases adoption of crop insurance products has remained low. One of the reasons hypothesised for the low demand and take-up of traditional index-based insurance products is the inherent complexity of the products, which make them difficult for farmers to perceive the direct benefits. This study was done to address this issue by conceptualizing and testing a simple, transparent and flexible weather index insurance contract in the form of weather securities. The objective of this project was to evaluate the potential of this new weather index insurance product in satisfying the insurance demands of small farmers. It also addressed responsiveness of insurance demands by small holder farmers to a set of interventions, namely price discounts, weather stations and insurance literacy.
In partnership with HDFC ERGO, 110 villages were randomly selected for this study. Out of these, the simplified WII product was sold in 72 villages. The remaining 38 formed the control group. The 72 selected treatment villages were further categorised into different treatment categories.
The following two treatments were randomised at village level:
- Weather Station: Selected villages were offered insurance that has payments triggered by a weather station installed by the study team.
- Insurance Literacy Training: Some villages received extensive insurance literacy training, while the rest got basic training. The product was launched during two consecutive summer agricultural seasons (known as Kharif in India) in 2011 and 2012. A baseline survey was conducted before launching the weather insurance product in kharif 2011, followed by a midline survey for assessing the impact of the product after the completion of kharif 2011. A comparison of differences in outcome variables between the baseline and midline survey of control and treatment villages provided a test of the impact of offering the simplified WII to the farmers.
The study found that as price and distance from a weather station increased, there was a drop in the demand for the simplified WII product. Demand was also influenced by comprehension of the product, as it was observed to be higher amongst households that received extensive insurance training. However, this understanding and subsequent demand seems to be of a transient nature, petering out after a year of implementation. This opens up possibilities of making insurance training a part of a more permanent process. It was also observed from the study that the purchase of WII increased the adoption of hybrid and high-yield varieties, improved cultivation practices, additional loans as well as an increase in cultivation area.
Findings from the study suggest that insurance providers and other stakeholders need to prioritise marketing activities, and strengthen delivery channels. In order to improve the intervention’s impact marketing needs to play a more integral role in the design and implementation process for agricultural micro-insurance products.