SEE ALSO
Weather-Indexed insurance for agriculture in India
Insurance can be a powerful tool for reducing vulnerability to climate change by transferring or sharing risk. Weather-indexed insurance is more effective than traditional crop insurance, as it protects the farmer’s overall income rather than the yield of a specific crop.
In India, the impact of climate variability has traditionally been tackled through government assistance or informal risk sharing at the community level. Rural households respond to the lack of formal financial services by turning to moneylenders, selling assets, reducing input in farming, or diversifying their activities.
Another strategy is to send family members to work elsewhere and remit payments. However, such traditional risk management strategies, while reducing vulnerability in the short term, can increase vulnerability over the longer term by promoting sub-optimal asset allocation.
For instance, small farmers may opt for multiple cropping to reduce income variability rather than risk.
This case study looks at the specific policy instrument of crop insurance, which addresses Government of India’s policy objective of protecting farmers from climatic stress, including droughts, floods, cyclones, etc. Other policy instruments that help address the same objective are promotion of crop diversification, long-range weather forecasting, and early warning systems. In the last two years, index-based weather risk insurance contracts have emerged as an alternative to traditional crop insurance in India.
This study draws on consultations with several insurance companies operating in India and IRDA (Infrastructure Regulatory and Development Authority of India), as well as a range of published literature, conference presentations, and news coverage.
Click here to read the full report.