Unpredictable rainfall is one of the largest sources of risk that poor Indian farming households face, because extremely low or heavy rainfall can substantially reduce crop yields and lead to big reductions in income and consumption. About 90 percent of the variation in crop production levels in India is caused by extremes in rainfall levels and patterns.
Only 10 percent of the Indian population is covered by any formal insurance against such abnormal patterns of rainfall. However, informal risk-sharing arrangements between members of the same sub-caste are common.
In order to make formal insurance cover more widely available, the Agriculture Insurance Company of India Ltd. (AICIL) introduced a rainfall insurance scheme known as "Varsha Bima" in south west India during the 2004 monsoon period.
Varsha Bima’s main aims are to:
- Cover the anticipated shortfall in crop yield resulting from a lack of rainfall.
- Guarantee financial compensation to the insured, in the event of rainfall adversity.
- Provide financial liquidity in rural areas through settling claims quickly.
- Help stabilise farm incomes, particularly in disaster years.
Varsha Bima was piloted in 20 areas in the states of Andhra Pradesh, Uttar Pradesh, Karnataka and Rajasthan.  In Tamil Nadu, Andhra Pradesh and Uttar Pradesh states, 42 villages were randomly selected to receive a marketing visit offering a new rainfall insurance product while another 21 villages were selected to serve as a comparison group.
The public impact
During the pilot phases of Varsha Bima, researchers observed the following results regarding take-up of the insurance:
- Roughly 40 percent of households who received marketing visits purchased insurance and, of those, 38 percent purchased multiple units with 17 percent purchasing five units or more.
- The availability of formal insurance increased risk-taking among farmers. In particular, rice farmers who were offered the rainfall insurance product were more likely to plant higher-risk rice varieties that were potentially much higher yielding, and they moved away from crop varieties that were considered to be more drought-resistant.
This suggests that such index insurance was able to increase average incomes by removing the barriers farmers face to planting more profitable crops.
Stakeholder Engagement Good
Researchers partnered with the Agricultural Insurance Company of India Lombard to design a suitable rainfall insurance product that insured against losses due to delayed onset of the monsoon by providing payouts at three trigger dates over two months during the monsoon season.
Political Commitment Fair
There was a fair degree of support from the central government in that AICIL comes under the administrative control of the Indian finance ministry and the operational control of the agriculture ministry. There was also support from states used in the pilot, such as Andhra Pradesh and Uttar Pradesh.
Clear Objectives Strong
The objectives of the initiative were clear and have been well maintained. Five clear options were identified that suit the varied requirements of the Indian farming community:
- Seasonal rainfall insurance, based on aggregate rainfall from June to September.
- Sowing failure insurance, based on rainfall between 15 June and 15 August.
- Rainfall distribution insurance with weight assigned to different weeks between June and September,
- An agronomic index, constructed on the basis of water requirements of crops at different ‘phenophases’.
- A catastrophe option, covering extremely adverse deviation of 50 per cent and above in rainfall during the monsoon season.
There was strong evidence to inform this initiative, from the extensive sample in the 63-village pilot study described above. There interesting additional findings:
- In the 42 ‘treatment villages’, researchers also randomly offered insurance premium discounts, to test how price affects take-up. In treatment villages in Uttar Pradesh, researchers also randomly varied the location of the rainfall station to test the impact of basis risk on insurance take-up. All respondents were informed about the location of the nearest rainfall station as part of the marketing visit.
- Cutting the price in half increased the probability of take-up by 17.6 percentage points.
- Distance to the rainfall station negatively affected take-up: for every kilometre increase in the distance from the rainfall station, the demand for Varsha Bima decreased by 6.4 percent.
- The study found that members of castes that are good at providing support in times of aggregate shocks (i.e., ones that already provide a form of index coverage) were less likely to purchase the monsoon insurance contract.
This fiscal feasibility of this project was evaluated using the pilot study. The results from the sample study were used to evaluate feasibility and were fed into the Varsha Bima products that AICIL decided to offer.
AICIL kept in mind the nature and extent of the risks that it would be expected to underwrite under Varsha Bima and organising reinsurance protection from both General Insurance Corporation of India and the international reinsurers to strengthen its capacity to bear the significant risks.  (These risks are evident from the recent droughts throughout India.)
There have been valid indicators for measuring the success of the project:
- It is index-based insurance, and provides payouts on the data gathered from the amount or timing of rainfall, a publicly observable.
- AICIL used historical rainfall data to calculate village-specific insurance prices, depending on the risk of a delayed monsoon. (The average price for a unit of insurance was 145 rupees.
After the successful pilot phase, AICIL and its researchers, farmers and the Indian government were well enough aligned to make the programme successful. The Varsha Bima product is sold to farmers by BASIX, a microfinance institution, and rainfall risk is underwritten by the insurance firm ICICI Lombard and their reinsurers.