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Patterns of rainfall insurance participation in rural India

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Abstract

This paper describes the contract design and institutional features of an innovative rainfall insurance policy offered to smallholder farmers in rural India and presents preliminary evidence on the determinants of insurance participation. Insurance take-up is found to be decreasing in basis risk between insurance payouts and income fluctuations, higher among wealthy households, and lower among households that are credit constrained. These results match predictions of a simple neoclassical model appended with borrowing constraints. Other patterns are less consistent with the benchmark model. Namely, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance take-up decisions, and risk averse households are found to be less, not more, likely to purchase insurance. We present evidence suggesting that these results reflect uncertainty about the product itself, given households' limited experience with it.

Suggested Citation

  • Xavier Gine & Robert M. Townsend & James Vickery, 2007. "Patterns of rainfall insurance participation in rural India," Staff Reports 302, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:302
    Note: For a published version of this report, see Xavier Giné, Robert Townsend, and James Vickery, "Patterns of Rainfall Insurance Participation in Rural India," World Bank Economic Review 22, no. 3 (October 2008): 539-66.
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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