Monsoon Insurance

Topics: Weather, Insurance, Risk Pages: 5 (1015 words) Published: November 14, 2012

Literature review
By Dr. A. Amarender Reddy
Scientist (Agricultural Economics)
Indian Institute of Pulses Research, Kanpur-208024.

Background the paper reviewed the innovative techniques in agricultural/rural insurance, which overcome some of the disadvantages of yield based group insurance and suggests rainfall (weather) index insurance as a better alternative/complement to the existing agricultural insurance scheme. The weather (rainfall) index based insurance is also more compatible with reinsurance practices worldwide, which make primary insurers to cover their local/regional risks by reinsuring themselves with international reinsures. •Agriculture & Rural Development Working Paper 9

Innovative Financial Services for Rural India
Monsoon-Indexed Lending and Insurance for Smallholders
Ulrich Hess
The World Bank
Agricultural and Rural Development

This paper was prepared by Ulrich Hess. It draws extensively from author’s work on weather insurance and rural finance in India and Morocco •Townsend, and James Vickery, \Barriers to Household Risk Management: Evidence from India," Harvard Business School Working Paper, 2010, 09 (116).

What types of households buy index insurance? What factors prevent the remaining households from participating? And does the purchase of index insurance result in more efficient risk taking?

Rainfall Index Insurance in India
Daniel Stein
Dissertation submitted to the Department of Economics for the degree of Doctor of Philosophy in Economics at
The London School of Economics and Political Science
September 2011

This thesis provides three works which each contribute to understanding of the promising yet struggling market for rainfall index insurance in India

Findings of the study
Post impact of monsoon index insurance in stabilisation of farmer’s income. •Comparison of growth between states having index monsoon insurance with the states without monsoon insurance •Overall economic development of Indian economy due to index monsoon insurance •Penetration of monsoon insurance in India.

Purpose of the research (or rationale for the study)

For the rural poor in India, formal financial services would enable them to maximize returns on their surplus, smooth their consumption, and reduce their vulnerability to risk. However, their financial service needs—which include consumption credit and cash savings are seldom met due to systemic problems in the financial sector and monsoon risk. In 1991, a comprehensive household survey addressing rural access to finance revealed that barely one-sixth of rural households had loans from formal rural finance institutions (RFIs). Beyond credit, most of the rural poor also lack access to the banking system for savings. Farmers respond to the lack of formal financial services by turning to moneylenders; reducing inputs in Farming; over capitalizing and internalizing risk; and/or by over diversifying their activities which leads to sub-optimal asset allocation.

The combined effect of these coping strategies is a poverty trap. Smallholders cannot risk investing in fixed capital or concentrating on the most profitable activities and crops, because they cannot leverage the start-up capital and they face systemic risks that could wipe out their livelihoods at any point in time. The challenge for banks is to innovate a low-cost way of reaching farmers and helping them better manage risk .

Agricultural activity is inherently risky due to pest or disease-induced harvest failure, price volatility in commodities markets, or extreme weather events, such as droughts and floods. Smoothing consumption across years or seasons is a significant challenge for agrarian households in developing countries. Parchure (2002) estimated that in India about 90%...
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