Rainfall insurance: "weather" it rains or not
Agriculture in India is largely non-irrigated and rainfed. Smallholder farmers in rural areas are therefore extremely dependent on rainfall for their crops, livelihoods and food security.
A failed monsoon can mean a drastic drop in yield, forcing farmers to sell productive assets, forgo medical care, or reduce food consumption. In some cases, they sell their livestock because they are unable to buy fodder after spending all their income on food, a particularly common phenomenon in recent times due to high basic food prices. Poor households headed by women are among the most vulnerable, given their thin asset base. Traditional coping methods include finding work on neighboring farms (to supplement income for food) and borrowing from family and friends. But when everyone in a geographical area has been affected in the same way, these safety nets are often compromised as well.
While government-based crop insurance schemes are available, most smallholder farmers are unable to meet their eligibility requirements. Women, in particular, face challenges in access to credit, collateral, and financial services. Even when farmers are able to buy and use crop insurance, they have to wait years to receive payments. The private sector, on the other hand, has been wary of insuring crops at the individual farmer level: measuring actual loss at this small a scale is both costly and complex. And whether public or private, crop insurance schemes are subject to the overall problems of adverse selection (the schemes tend to attract farms with lower land quality) and moral hazard (farmers may be more inclined to let crops suffer or fail in order to get payouts).
In 2006, the Self-Employed Women's Association (SEWA), a non-governmental organization of poor, self-employed women workers (many of whom are rural women farmers), partnered with the Centre for Micro Finance (CMF) and Harvard University to pilot a relatively new financial product known as weather insurance – in this case, rainfall insurance.
How it works
The system uses measurements from official rainfall stations located close to the farmers’ fields. Participating farmers pay a small premium, and in return, they are guaranteed a specified amount of money if there is a rain shortfall. The amount increases with the severity of the shortfall or flood.
The rainfall insurance scheme solves all three of the major problems associated with the crop insurance approach: administrative costs are lower as the system does not require an agent to measure actual crop loss in each farm, and there is less likelihood of adverse selection and moral hazard, as farmers do not have to prove their losses and can continue to focus on making the best decisions for their crop.
The programme started with a pilot group of 500 households in over 30 villages in the state of Gujarat. Since then, it has grown to almost 2000 households in over 100 villages, and is set to continue to expand in the near future. While rainfall was not low enough to trigger payouts in the first three years, households in several areas of the Ahmedabad and Anand districts received compensation for low rainfall in 2009.
- FAO. 2013. Ending Poverty: Learning from the Good Practices of Smallholder and Marginal Farmers. Rome.
- Centre for Micro Finance. 2013. Rainfall Insurance (available at www.centre-for-microfinance.org/rainfall-insurance/ ).
- Abdul Latif Jameel Poverty Action Lab. 2013. Rainfall Insurance in Gujarat, India (available at www.povertyactionlab.org/evaluation/rainfall-insurance-gujarat-india ).