Selling formal insurance to the informally insured

Principal Researchers: Profs. Mark Rosenzweig (Yale University) and Mushfiq Mobarak (Yale University)

In many parts of the developing world, farming remains risky business. A number of environmental factors such as pest infestation, excess rainfall, and drought raise the risk of crop failure, a potentially catastrophic event for agriculture-dependent households. Furthermore, households lack access to formal insurance mechanisms that would allow them to effectively mitigate risk. Farmers have traditionally used informal methods of insurance (providing each other with gifts and loans, forward-selling labor to landowners at high implicit interest rates, etc.) to combat risks associated with crop failure. However, recent innovations in the micro finance industry have facilitated the introduction of micro-insurance products which formally insure farmers against production risks. In particular, new insurance products such as rain-indexed weather insurance serve as reliable and transparent instruments for farmers to insure themselves against uncertain weather conditions.

Despite the benefits of these products, in India the take-up of rain-indexed insurance has been relatively low. There may be a number of reasons why farmers do not buy rain-indexed insurance at higher rates: distrust of insurance companies, weak understanding of the insurance products being offered, or prior commitments to existing informal insurance networks.

In this project, researchers aim to identify the root cause of low take-up rates for formal insurance. Specifically, researchers will examine the role of jati-based networks in providing alternative forms of insurance through implicit social contracts. This study is being conducted in three states across India (Tamil Nadu, Andhra Pradesh and Uttar Pradesh) in approximately 63 villages. The baseline for this study is scheduled to begin in late August 2010.

CMF Research Associate: Lisa Nestor