Demand for Crop Insurance in Developing Countries: New Evidence from India

Abstract

Determining farmers’ real demand for crop insurance is difficult, especially in developing countries, where there is a lack of formal financial sector integration and a high reliance on informal risk mitigation options. We provide some new estimates of farmers’ willingness‐to‐pay for insurance in the context of a large‐scale subsidised programme in India. We conducted a discrete choice experiment with agricultural households across four states in India, enabling us to estimate preferences for specific insurance policy attributes such as coverage period, method of loss assessment, timing of indemnity payments and the cost of insurance. Our results suggest that farmers do value crop insurance under certain conditions and some are willing to pay a premium for such coverage in excess of the subsidised rates they are currently required to pay under this programme. In particular, farmers value the assurances that they will receive timely payouts when they incur losses, and may not have a strong preference for the method with which losses are assessed. On the other hand, farmers are quite sensitive to coverage periods. Our baseline assessment shows that when optimised to farmer requirements, there can be a sizeable demand for crop insurance by developing country farmers.

What is the evidence linking financial assistance for drought-affected agriculture and resilience in tropical Asia? A systematic review

“…Insurance (indemnity) was often negatively associated with income (in 54% of the articles referring to such insurance schemes): firstly, because the premium was considered a financial burden (Bordey and Arida, 2015) and, secondly, because crops could be damaged by drought but the farmer did not receive any insurance payment (Singh and Agrawal, 2020). The classification of references to index insurance was mostly uncertain (71%), as it could help smooth income (Prasada, 2020) but compensation levels could be variable and not always adequate (Ghosh et al 2021). Credit access, including through micro-finance initiatives, also helped farmers invest in income-generating activity (Habiba et al 2014); however, it was more often negatively associated with high repayments (Brown et al 2019) and debt (Taylor, 2011).…”

“…Centralised investment in irrigation was positively associated with improved farm management and adaptation (Mariano et al 2012); however, such interventions were also negatively associated with adaptive behaviour as they could discourage crop diversification (Auffhammer and Carleton, 2018). Similarly, government subsidies were coded as negatively influencing adaptive behaviours, for example input subsidies encouraged undesirable land management practices (Ghosh et al 2021).…”

“…For example, farmers were adapting their land and water management, diversifying their livelihoods and protecting themselves through self-insurance (e.g. Ghosh et al 2021). However, it was also evident that there was low engagement with diversification (Bordey and Arida, 2015; Prasada, 2020) and limitations to the resilience of self-insurance to extreme or successive shocks (Gaurav, 2015), particularly for more vulnerable groups.…”

“…Traditional insurance schemes were reported as an inefficient use of tax revenue (Ghosh et al 2021) that were often not financially sustainable (Singh and Agrawal, 2020) due to high running costs (Alam et al 2020). Whilst index insurance had more positively coded references, this was framed by a relative comparison to traditional insurance products where index-based products were more attractive to governments and private insurers as they were less expensive to run (Bordey and Arida, 2015;Prasada, 2020).…”

“…Formal institutions, such as governments, respond to the economic risks of drought (and other climate and nonclimate conditions) through a range of financial mechanisms (Smit and Skinner, 2002). At a policy level, governments may select from a variety of strategies that aim to manage the risks associated with climate variability and change (Aakre et al 2010), that help to smooth farm incomes, and include publicly funded input subsidies, compensation for harvest losses, minimum price support systems, Communicated by Jamie Pittock public-private insurance schemes or low-interest loans (Prasada, 2020;Ghosh et al 2021). Multiple agencies may have to coordinate decisions during dry periods relating to the declaration of a disaster and how and when to distribute financial support (Stricevic et al 2011).…”