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Demand for a Simple Weather Insurance Product in India: Theory and Evidence

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  • Ruth Vargas Hill
  • Miguel Robles
  • Francisco Ceballos

Abstract

This article analyzes the demand for a simple rainfall-based weather insurance product among farmers in rural India. We explore the predictions of a standard expected utility theory framework on the nature of demand in terms of price, the basis of the hedge, and risk aversion using data from a randomized control trial. We find that demand behaves as predicted: it falls with price and basis risk and is hump-shaped in risk aversion, with price sensitivity decreasing at higher levels of basis risk. We estimate a negative price elasticity of 0.58 and find that doubling the distance to a reference weather station decreases demand by 18%. These results indicate that improving pricing and quality of insurance products can directly increase demand. In addition, we examine the impact of insurance training relative to other mechanisms designed to increase understanding. The evidence suggests that increased incentives to learn or learning by using are more effective at increasing both understanding and demand. Finally, we contribute to the scarce evidence on the demand for insurance over time. In terms of our main interventions, we find that the effect of premium subsidies persists over time, while the impact of investments in new weather stations diminishes and the effect of increased training in the first season seems to disappear during the second season. Importantly, while having previously purchased insurance does not encourage future uptake, receiving a payout does. This could reflect issues of trust in the product or the insurance company, and constitutes an important topic for future research.

Suggested Citation

  • Ruth Vargas Hill & Miguel Robles & Francisco Ceballos, 2016. "Demand for a Simple Weather Insurance Product in India: Theory and Evidence," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(4), pages 1250-1270.
  • Handle: RePEc:oup:ajagec:v:98:y:2016:i:4:p:1250-1270.
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    File URL: http://hdl.handle.net/10.1093/ajae/aaw031
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    Cited by:

    1. Ward, Patrick S. & Kumar, Neha & De Nicola, Francesca & Hill, Ruth & Makhija, Simrin & Spielman, David J. & Magnan, Nicholas, 2017. "Insuring Against Drought: Evidence on Agricultural Intensification and Demand for Index Insurance from a Randomized Evaluation in Rural Bangladesh," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258090, Agricultural and Applied Economics Association.
    2. Negi, Digvijay S., 2018. "Tail-dependent Rainfall Risk and Demand for Index based Crop Insurance," 2018 Annual Meeting, August 5-7, Washington, D.C. 274481, Agricultural and Applied Economics Association.
    3. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.
    4. Shin, Soye, 2018. "Better understanding of Demand for Weather Index Insurance among Smallholder Farmers under Prospect Theory," 2018 Annual Meeting, August 5-7, Washington, D.C. 274477, Agricultural and Applied Economics Association.
    5. Hill, Ruth Vargas & Kumar, Neha & Magnan, Nicholas & Makhija, Simrin & de Nicola, Francesca & Spielman, David J. & Ward, Patrick S., 2017. "Insuring against droughts: Evidence on agricultural intensification and index insurance demand from a randomized evaluation in rural Bangladesh," IFPRI discussion papers 1630, International Food Policy Research Institute (IFPRI).
    6. repec:eee:jfpoli:v:74:y:2018:i:c:p:172-198 is not listed on IDEAS

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