Rainfall Index Insurance
Smallholder agricultural producers in rainfall-dependent regions face severe weather risk, which forces them into low-risk, low-yield production strategies due to incomplete risk-sharing markets.
Picture this
Think of it like a weather thermometer attached to an automated cash register; if rain falls below a preset mark on the gauge, money is automatically paid out without needing an inspector to visit the farm to check damaged crops.
What the evidence says
Insurance provision increased the proportion of farmers planting high-return cash crops by 6 percentage points (a 12% relative increase, p=0.041), generating a 27% increase in land area sown for cash crops.
- Who
- N = 1,479 small agricultural firms across 45 villages in Mahbubnagar and Anantapur districts, Andhra Pradesh, India [6].
- How
- Randomized Controlled Trial (RCT) assigning 10 ICICI Lombard rainfall insurance policies (market value ~Rs. 1,000) to a treatment group versus an equal actuarial cash promise (Rs. 350) to a control group [7, 8].
What to do
Offer retail rainfall index insurance linked to local rain gauges to smallholders prior to monsoon onset to enable investment in higher-yielding, higher-risk crops.
From the source
"We find that the provision of insurance induces farmers to shift production towards higher-return but higher-risk cash crops, particularly amongst more-educated farmers."
How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment