Weather Based Crop Insurance in India
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.
| Summary: | 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. |
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