Selling Formal Insurance to the Informally Insured

Farmers face enormous production risks due to unpredictable rainfall, yet most do not have any formal insurance. One explanation for this is the existence of informal network-based risk sharing. Using a randomized controlled experiment, we study the demand for, and effects of, offering formal index-based rainfall insurance in an environment of tightly knit informal risk sharing networks: sub-castes in rural India. We partner with the Agricultural Insurance Company of India (AICI) to market a new insurance product to farmers for whom we have a rich history of their sub-caste’s responsiveness to household and aggregate rainfall shocks. Our first rounds of data collection have shown that (a) When formal insurance carries basis risk, informal risk sharing covering idiosyncratic losses enhances the benefits of index insurance, and (b) Formal index insurance enables households to take more (potentially profitable) risk even in the presence of informal insurance. We are seeking funds to conduct an additional round of data collection to understand the spillover effects of index insurance on other members of risk sharing networks. We plan to market the insurance product to both the original set of households and to households connected to the original set by their sub-caste identity and their village location.