Microfinance

INDIAN FARMERS WANT WEATHER INSURANCE – BUT FEW SEEM WILLING TO PAY FOR IT

Farmers in southern India are attracted to the idea of insurance against uncertain weather but few are willing to pay the full premium. Instead, they prefer to rely on traditional and informal types of insurance despite these being less reliable. These are the central findings of research by Janani Ramasubramanian, presented at the Royal Economic Society’s 2013 annual conference.

The study analyses data from a survey of 400 respondents collected by the author in Erode district, Tamil Nadu. Farmers were asked about the use of ‘microinsurance’, which covers them against abnormal weather, such as droughts or floods, which would severely affect their earnings. The research finds that:

  • Around 73% of farmers are inclined to join microinsurance programmes. But the amount they are willing to pay for these schemes depends on how much access they have to other ways of coping with risk such as savings, borrowings and diversification into other crops.
  • Households with access to savings and borrowings are only marginally interested in paying for a crop insurance product. The average amount they are willing to pay as premium for the policy is around £11.
  • Households that do not have access to other risk-coping strategies are definitely willing to participate in and to pay a higher premium averaging around £22.
  • Other factors that influence participation include household wealth, financial literacy and the age of the respondent.

Agriculture in India accounts for 23% of the GDP, over 80% of agricultural land is highly rainfall dependent and farmers constantly battle against crop failures caused by shock weather conditions. Despite this, the uptake of crop microinsurance is still low considering the large population in need of such products.

The author comments:

‘Microinsurance education could play a significant role in educating households on how microinsurance works and help them re-think their strategy towards coping with agriculture shocks.’

More…

Microinsurance is a powerful risk management tool that facilitates low-income households’ transition out of poverty. It refers to affordable insurance policies that cater to specific risks faced by poor households. The microinsurance sector has expanded significantly in the last few years: from 78 million individuals insured in 2006 to 135 million insured in 2009 worldwide.

India is a pioneer in microinsurance and is one of the first countries that formally regulates its microinsurance sector. Estimates suggest that 50% of the total population covered by microinsurance worldwide live in India.

Indian agriculture accounts for 23% of the nation’s GDP. Over 80% of agricultural land is highly rainfall-dependent and farmers constantly battle against crop failures caused by weather vagaries, rising costs of cultivation, pest attacks and other factors. But the uptake of crop microinsurance is still low considering the large population in need of such products.

A study by Janani Ramasubramanian in Tamil Nadu reveals that the existing low demand for weather index-based agriculture microinsurance policies, which provide cover against deviations in normal weather parameters such as rainfall or temperature, can be better understood by separating the willingness to participate in microinsurance policies and the willingness to pay for such schemes. This is based on primary data collected by the author from 400 respondents in Erode district, Tamil Nadu.

Around 73% of respondents are inclined to join microinsurance programmes. But the amount of money they are willing to pay for these schemes is lowered by the extent to which they have access to other agriculture risk coping mechanisms such as savings, borrowings, diversification, etc. The study highlights the following:

  • Households with access to savings and borrowings are only marginally interested in paying for a crop insurance product. The average amount they are willing to pay as premium for the policy is around £11.
  • Households who do not tap into other risk coping sources are definitely willing to participate in and pay higher premium for a given product (average £22).
  • Other factors that influence participation include risk preferences, household wealth, product literacy and age of the respondent.

Savings, borrowings, diversification etc. may help the transition out of smaller losses. But such measures will fail in the event of catastrophic shocks. Microinsurance, being a market-based solution, is designed in a manner that it can effectively cater to both small and large-scale shocks.

It seems that the awareness of insurance products is high. But the comfort level with such products is low. There is greater reliance on existing tools that farm households have tapped into for generations. Microinsurance education could play a significant role in educating households on how microinsurance works and help them re-think their strategy towards coping with agriculture shocks.

Microinsurance is a relatively new area of research and has seen a lot of growth in the last decade. Since there is a hedge against agriculture losses, crop microinsurance could also encourage farmers to use better quality inputs and follow better methods of production, thereby increasing acreage in the long run. The author is currently working on primary data collected from West Bengal to examine the interactions between insurance and input use.

We are seeing the tip of an iceberg in the crop microinsurance market in India. Conscious effort towards planning, designing and implementing relevant crop insurance products at the grass root level are an immediate requirement. The very fact that this will affect and transform the lives of farm households in India is reason enough for sustained work in this area.

ENDS


Contact:

Janani Ramasubramanian: +44 7425 337182 (jr277@sussex.ac.uk)

RES media consultant Romesh Vaitilingam:
+44 (0) 7768 661095
romesh@vaitilingam.com
@econromesh

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