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Tirtha Chatterjee, Isaac Manuel, Ashutosh Shekhar

Smallholder access to weather securities: demand and impact on consumption and production decisions. Tirtha Chatterjee, Isaac Manuel, Ashutosh Shekhar Centre for Insurance and Risk Management, CIRM-IFMR Ruth V. Hill, Peter Ouzounov, Miguel Robles

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Tirtha Chatterjee, Isaac Manuel, Ashutosh Shekhar

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  1. Smallholder access to weather securities: demand and impact on consumption and production decisions Tirtha Chatterjee, Isaac Manuel, Ashutosh Shekhar Centre for Insurance and Risk Management, CIRM-IFMR Ruth V. Hill, Peter Ouzounov, Miguel Robles International Food Policy Research Institute - IFPRI Netherlands – April 2012

  2. Research problem: • Smallholders in developing countries are exposed to weather shocks. • Weather shocks have large impact on output • In the absence of efficient mechanisms to transfer/share risks then impact on welfare • Negative impact on investment decisions • Volatile income and consumption • Smallholders have none or very limited acces to weather insurance markets • Weather index-based products is an effort to provide access to smallholder to weather insurance markets • Uptake on existing weather index-based products is low

  3. Research problem: • We propose a new approach in providing weather index–based insurance products • Multiple weather securities that pay a fixed amount as opposed to a unique policy • Weather securities are simple and flexible • We run a pilot project to provide weather securities and understand demand (uptake) and impact on consumption and production decisions • In this presentation: What is the impact of three interventions on weather securities uptake? (preliminary results) • Price discounts • Insurance literacy training • Distance to weather station (basis risk) Research questions:

  4. Product: Basic concept • Basic product: weather security (rainfall excess)… Payout (Rs.) Price (premium) Index Trigger value Exit

  5. Product: basic concept… • Basic product: weather security (rainfall deficit)… Payout (Rs.) Price (premium) Index Exit Trigger value

  6. Product: multiple securities • We identify 3 cover periods: • For each cover period we have multiple (at least two) products: • Different trigger values • Different prices • Same payouts • Farmers are free to choose among different products!

  7. Final products: Dewas district Not implemented triggered

  8. Location and sample • Product was marketed in 3 districts of Madhya Pradesh, India: Dewas, Bhopal, Ujjain • Research focus: 30 landowning households per village

  9. Data: oversampled hhs with larger land holding and higher education

  10. Data • Average 8.6 acres of land, 90% sown with soy • Over last 10 years, 15% experienced flood and 40% experienced drought • 35% trust private insurance schemes • Low knowledge of insurance (1/2 correct) • 26% believe closest weather station is a good measure of rain for their field

  11. Exogenous (randomized) treatments • Insurance literacy training • Basic training (2 hours) 72 (all) villages • Intensive training (4 hours) 35 villages • Three new randomly placed reference weather stations • 2 in Dewas: 16/29 villages • 1 in Bhopal: 12/30 villages

  12. Exogenous (randomized) treatments • Allocation of price discount vouchers • In Dewas and Bhopal (59 villages) • Random selection at household level: • 5 hhs x [ Rs. 45, Rs. 90, Rs 135, Rs 180 ] • 10 hhs x No discount • Only sample households received discounts • In Ujjain (13 villages) • Random selection at village level (all hhs receive vouchers) • 2 villages x [ Rs. 30, Rs 60, Rs 90, Rs 120 ] • 5 villages x No discount

  13. Research results, I • Overall uptake 6.8% • On average, they insured less than an acre and much less than their total soy land ownership • There are important differences between districts

  14. Research Results, II

  15. Research Results • Distance to weather station has no effect quantity bought, but only on whether household buys or not

  16. Implications policy and practice • Cost and Benefit (uptake) analysis of interventions • ILT • Cost per‐person $10.40 -> + 5% points take-up • Cost of Increasing take‐up rates by 10% points = $20.80 per-person • New weather stations • Cost per-person $6.67 -> + 5% points take‐up • Cost of Increasing take‐up rates by 10% points = $13.34 per-person • Price discounts • To increase take‐up rates by 10% points a discount of 115 Rs ($2.30) per policy is needed. • In Bhopal and Dewas the amount spent on discounts per-person who was offered a discount was $0.2 -> increase in take-up by 10% points • Price discounts is the most cost effective intervention

  17. Discussion • Marketing efforts are key! We have casual evidence that take-up differences across districts is related to marketing efforts by insurance company • Second round implementation will pay more attention to incentives to insurance agents • Research pilots need to encourage permanent presence among treatment group • Ideal study is on impact on consumption and production decisions (welfare) • We requiere higher take-up rates • What’s the ideal demand analysis of multiple products? • System of demand equations • Again we need higher take-up rates

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