Patterns of Rainfall Insurance Participation in Rural India

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 takeup is found to be
 decreasing in basis risk between insurance payouts and
 income fluctuations, increasing in household wealth and
 decreasing in the extent to which credit constraints bind.
 These results match with 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
 takeup decisions, and risk-averse households are found to be
 less, not more, likely to purchase insurance. We suggest
 that these results reflect household uncertainty about the
 product itself, given their limited experience with it.