Given the significance of the agricultural sector in India and its vulnerability, an adequate and sustainable risk management system is critical. However, uptake of microinsurance is quite low. This column presents research that shows that while there is awareness regarding market-based formal insurance schemes, people continue to be more comfortable relying on own savings or informal borrowing, which can only help manage small shocks or losses.
Microinsurance is a powerful risk management tool that facilitates low-income households transition out of poverty. It refers to affordable insurance policies that cater to specific risks faced by poor households. Such risks include shocks to life, health, agriculture, livestock and small businesses among others. The microinsurance sector has expanded exponentially in the last few years, from 78 million individuals insured in 2006 to 135 million insured in 2009 worldwide.
India is a pioneer in microinsurance and is one of the first countries that formally regulated its microinsurance sector. Estimates reveal that 50% of the total population covered by microinsurance worldwide, lives in India.
Indian agriculture accounts for 23% of the nation’s GDP. Over 80% of agricultural land is highly rainfall dependent and farmers constantly battle against crop failures caused by weather vagaries, rising costs of cultivation, pest attacks and other factors.
In view of the significance of agriculture in the Indian economy and its vulnerability, the need for evolving an adequate, sustainable risk management system has been duly recognised. However, the uptake of crop microinsurance is low, considering the large population in need of such products.
Uptake of crop microinsurance
My study in Erode district of Tamil Nadu examines the low uptake of weather index-based agriculture microinsurance policies, using primary data collected from 400 turmeric farmers in the district (Ramasubramanian 2012). Weather index-based policies provide a cover against deviations in normal weather parameters such as rainfall or temperature for specific crops.
Erode district is one of the major producers of turmeric in India. Heavy rainfall is a major risk to turmeric. Water stagnation can completely corrode the root crop resulting in heavy losses. Thus, the product under study provides a cover against excess rainfall during the cropping season.
Farmers in this area have had no prior experience with index-based insurance policies. Most households prefer to draw from existing savings or borrow from friends, relatives or moneylenders to manage shocks. Formal borrowings from banks are considered tedious, as it requires heavy documentation. While some households are members of Self-Help Groups (SHGs), only a few are aware of Microfinance Institutions (MFIs).
Willingness to join versus willingness to pay
I examine crop microinsurance uptake on two different levels – the willingness to participate in formal market-based insurance schemes and the amount of money a household is willing to pay for these schemes.
Households may be willing to join microinsurance programmes as they see value in the product but may not be willing to pay as they lack the ability to pay, have no trust in the insurance provider/ agent, or believe that the product is not worth its price. This premise could explain why the uptake of insurance is low despite the apparent need for such products.
Results indicate that around 73% of respondents are inclined to join microinsurance programmes. However, the amount of money they are willing to pay for these schemes is lowered by the extent to which they have access to other agriculture risk coping mechanisms such as savings, borrowings, diversification etc. Specifically, I find that:
- Households with access to savings and borrowings are only marginally interested in paying for a crop insurance product. The average amount they are willing to pay as premium for the policy is around Rs. 880 per year ($16 approximately)
- Households who do not tap into other risk coping sources are definitely willing to participate and pay higher premium for a given product (average Rs. 1760 or $32 approximately).
- Other factors that influence participation include risk preferences, household wealth and age of the respondent
Interestingly, respondents who are more averse to risk in general, are more likely to pay higher premium for insurance even if they have access to other risk coping strategies. Also, farmers who are members of SHGs or MFIs are less likely to participate in insurance programmes.
Why these findings matter
Savings, borrowings, diversification etc. may help transition out of smaller losses. However, such measures tend to fail in the event of catastrophic shocks. Microinsurance, being a market-based solution, is designed in a manner that it can effectively cater to both small and large scale shocks.
It seems that the awareness of insurance products is high. However, the comfort level for such products is low. There is greater reliance on exisiting tools that farm households have tapped into for generations. Only the left-over risks are passed on to insurance!
Microinsurance education could play a significant role here. Modules on the long term impacts of the existing risk coping mechanisms of farm households and how these measures may fail in certain cirumstances could help households re-think their risk coping portfolio.
Additionally, educating households on how formal insurance works and how they can cater to catastrophic shocks by pooling risks across larger geographies may encourage them to invest in market-based formal risk management techniques such as microinsurance to deal with shocks in the long run.
Microinsurance is a relatively new area of research and has seen a lot of growth in the last decade. Since crop microinsurance provides a hedge against agriculture losses, it could also encourage farmers to use better quality inputs and follow better methods of production thereby increasing acreage in the long run. I am currently working on primary data collected from West Bengal, India to examine the interactions between insurance and input use.
We are seeing the tip of an iceberg in the crop microinsurance market in India. Conscious effort towards planning, designing and implementation of relevant crop insurance products at the grass root level are an immediate requirement. The very fact that this will affect and transform the lives of farm households in India is reason enough for sustained work in this area.
- Ramasubramanian, Janani (2012), "Willingness to pay for index based crop microinsurance in India", Mimeo