Weather Based Crop Insurance in India

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 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.