Weather Based Crop Insurance in India

31 Pages Posted: 20 Apr 2016

See all articles by Daniel Jonathan Clarke

Daniel Jonathan Clarke

affiliation not provided to SSRN

Daniel Clarke

University of Oxford

Olivier Mahul

World Bank - Financial Sector Development

Kolli N. Rao

affiliation not provided to SSRN

Niraj Verma

affiliation not provided to SSRN

Date Written: March 1, 2012

Abstract

The weather index insurance market in India is the world's largest, having transitioned from small-scale and scattered pilots to a large-scale weather based crop insurance program covering more than 9 million farmers. This paper provides a critical overview of this market, including a review of indices used for insurance purposes and a description and analysis of common approaches to design and ratemaking. Products should be designed based on sound agronomic principles and further investments are needed both in quantifying the level of basis risk in existing products, and developing enhanced products with lower basis risk. In addition to pure weather indexed products, hybrid products that combine both area yield and weather indices seem promising, with the potential to combine the strengths of the individual indices. A portfolio approach to pricing products, such as that offered by Empirical Bayes Credibility Theory, can be significantly more efficient than the standalone pricing approaches typically employed in the Indian market. Legislation for index insurance products, including consumer protection legislation, should be further enhanced, for example by requiring disclosure of claim payments that each product would have made in the last ten years. The market structure for weather based crop insurance products could better reward long-term development of improved product designs through product standardization, longer term contracts, or separating the roles of product design and delivery.

Keywords: Bankruptcy and Resolution of Financial Distress, Insurance & Risk Mitigation, Hazard Risk Management, Climate Change Economics, Debt Markets

Suggested Citation

Clarke, Daniel Jonathan and Clarke, Daniel and Mahul, Olivier and Rao, Kolli N. and Verma, Niraj, Weather Based Crop Insurance in India (March 1, 2012). World Bank Policy Research Working Paper No. 5985. Available at SSRN: https://ssrn.com/abstract=2016750

Daniel Jonathan Clarke (Contact Author)

affiliation not provided to SSRN

No Address Available

Daniel Clarke

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Olivier Mahul

World Bank - Financial Sector Development ( email )

Washington, DC 20433
United States

Kolli N. Rao

affiliation not provided to SSRN

No Address Available

Niraj Verma

affiliation not provided to SSRN

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