For many of us, rain is just a minor inconvenience, something that cancels events and necessitates a dash to the car without getting soaked. But for farmers worldwide, rainfall ensures survival: it’s the lifeblood of crops and a means of financial stability.
A recent study by Anita Mukherjee, assistant professor of risk and insurance at the Wisconsin School of Business, examines weather-indexed insurance for financially vulnerable agricultural households in India.
Designed as a protective measure to mitigate against the financial effects of droughts and fluctuations in rainfall, the insurance is purchased individually by farmers, many of whom must source piecemeal outside work if the lack of rainfall becomes severe enough. One of the benefits of rainfall-indexed insurance is that it pays farmers simply based on the rain level, making it easy to figure out payments quickly.
Along with co-authors Shawn Cole of Harvard University and Jeremy Tobacman of the University of Delaware, Mukerjee built and calibrated a model using earnings and investment data from a decade-long survey of 800 households located in western India’s Gujarat State. The model allowed for analysis of factors such as opportunity for wage labor, production shocks, access to insurance, and susceptibility of wages to rain levels.
The findings suggest that rainfall insurance is a particularly beneficial option for farmers with few opportunities for outside work, as well as for those whose outside wages are reactive to rainfall levels. Additionally, households tend to be more comfortable with increased rainfall risk once they had the insurance in place, thereby lessening the desire to search for outside wage work—a form of what the study calls “self-insurance”—off of the farm. One of the expectations with the emergence of weather-indexed insurance is that farmers will feel more comfortable growing new and more lucrative crops that would be riskier to attempt uninsured.
The study’s findings might help pinpoint where indexed insurance can be most accurately targeted, Mukherjee says. And one of the complexities of the insurance—which can be indexed to agricultural measures other than rainfall—is not found in its design, but by the fact that it’s not being utilized enough.
Agricultural households are forced to manage risks from two separate but connected economies, farm production and wage labor. Given that balancing act, weather insurance has the potential to significantly reduce financial vulnerability among agricultural households.
—Assistant Professor Anita Mukherjee
“Our study is really about managing risk and financial decision-making given that there’s a fair bit of concern around climate change and insurance protection for agricultural households,” Mukherjee says. “A challenge in distributing insurance to this demographic group is that many don’t buy it.”
Despite these barriers, weather-indexed insurance is still a fairly new development, Mukherjees says, and has only been introduced in roughly a dozen countries. The findings suggest a number of policy implications for both insurance companies and government, as well as avenues for future research. Rainfall shocks, for example, can differ vastly among regions, so governments may be slow to fill the gaps if they deem the need is not pressing enough.
“Agricultural households are forced to manage risks from two separate but connected economies, farm production and wage labor,” Mukherjee says. “Given that balancing act, weather insurance has the potential to significantly reduce financial vulnerability among agricultural households. Our study has made contributions to the literature regarding the role of ‘self-insurance’ and how it impacts financial decision-making and the adoption of weather-indexed insurance.”
Read the paper: “Targeting Weather Insurance Markets” published in Journal of Risk and Insurance.
Anita Mukherjee is an assistant professor in the Department of Risk and Insurance at the Wisconsin School of Business.