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Insuring Farmers Against Weather Shocks: Evidence from India, As Partial Fulfilment of the Requirements of Grant OW3.1171 Awarded Under Open Window 3

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Insuring Farmers Against Weather Shocks: Evidence from India, As Partial Fulfilment of the Requirements of Grant OW3.1171 Awarded Under Open Window 3 Jeremy Tobacman Insuring farmers against Daniel Stein weather shocks Vivek Shah Laura Litvine Evidence from India Shawn Cole Raghabendra Chattopadhyay July 2017 Impact Agriculture Evaluation Report 29 About 3ie The International Initiative for Impact Evaluation (3ie) is an international grant-making NGO promoting evidence-informed development policies and programmes. We are the global leader in funding, producing and synthesising high-quality evidence of what works, for whom, how, why and at what cost. We believe that better and policy-relevant evidence will help make development more effective and improve people’s lives. 3ie impact evaluations 3ie-supported impact evaluations assess the difference a development intervention has made to social and economic outcomes. 3ie is committed to funding rigorous evaluations that include a theory-based design, use the most appropriate mix of methods to capture outcomes and are useful in complex development contexts. About this report 3ie accepted the final version of this report, Insuring farmers against weather shocks: evidence from India, as partial fulfilment of the requirements of grant OW3.1171 awarded under Open Window 3. The report has been formatted to 3ie standards. However, despite best efforts in working with the authors, some references are still missing and figures and tables could not be improved. We have copy-edited the content to the extent possible. These efforts caused a delay in publishing this report, which is why the series number and date are out of sequence. All of the content is the sole responsibility of the authors and does not represent the opinions of 3ie, its donors or its board of commissioners. Any errors and omissions are the sole responsibility of the authors. Please direct any comments or queries to the corresponding author, Jeremy Tobacman, at [email protected] Funding for this impact evaluation was provided by 3ie’s donors, which include UK Aid, the Bill & Melinda Gates Foundation and the Hewlett Foundation. A complete listing of all of 3ie’s donors is available on the 3ie website. Suggested citation: Tobacman, J, Stein, D, Shah, V, Litvine, L, Cole, S and Chattopadhyay, R, 2017. Insuring farmers against weather shocks: evidence from India, 3ie Impact Evaluation Report 29. New Delhi: International Initiative for Impact Evaluation (3ie) 3ie Impact Evaluation Report Series executive editor: Beryl Leach Production manager: Angel Kharya Assistant production manager: Akarsh Gupta Copy editor: Scriptoria Proofreader: Sarah Chatwin Cover design: John F McGill and Akarsh Gupta Cover photo: Bernard Gagnon/Wiki Commons © International Initiative for Impact Evaluation (3ie), 2017 Insuring farmers against weather shocks: evidence from India Jeremy Tobacman The Wharton School at the University of Pennsylvania Daniel Stein The World Bank Vivek Shah Berkeley Research Group Laura Litvine University College London Shawn Cole Harvard Business School Raghabendra Chattopadhyay IIM-Calcutta 3ie Impact Evaluation Report 29 July 2017 Acknowledgements We are very grateful to 3ie for financial support, technical review and helpful suggestions during this project. We would also like to thank USAID AMA/CRSP (United States Agency for International Development Assets and Market Access Collaborative Research Support Program), the International Growth Centre, the Wharton Dean’s Research Fund and the Division of Faculty Research and Faculty Development at Harvard Business School; a team of excellent Centre for Micro Finance research assistants; and Chhaya Bhavsar, Nisha Shah, Reema Nanavaty and their colleagues at the Self Employed Women’s Association, without whom this project would not have been possible. i Summary With weather risk a key source of income vulnerability for many of the 2.5 billion people around the world who derive their income from smallholder agriculture, rainfall insurance represents a potentially important product innovation. This study performs a rigorous evaluation of the long-term impacts of rainfall insurance access and coverage on agricultural investment and outcomes, consumption and well- being proxies using a randomised controlled trial design. Main findings We find no systematic, long-term effect of insurance access or adoption on agricultural investment decisions. There is also little to no statistical difference in reported agricultural revenues and profits. This is true even though (randomly assigned) subsidies caused households that purchased insurance policies to experience greater financial income from insurance payouts than financial costs from insurance premiums. These findings suggest that the insurance products studied were not sufficient to induce farmers to adopt theoretically promising alternative investments, such as high-yielding variety crops. Demand for rainfall insurance among study households was moderate. Depending on the year and marketing treatment, between 25% and 60% of treated households elected to purchase rainfall insurance. Demand was also shallow, as the typical buyer purchased only a single policy unless offered a discount on a bundle of policies. These results are consistent with fragile prospects for voluntary private markets for rainfall risk management. Analyses of impacts on consumption and well-being proxies reveal that insurance payouts often act as a substitute for informal transfers; however, this does not translate into an impact on consumption or savings. We also see weak results on our proxies for well-being, which is consistent with the impact we see on investment and further supports our conclusion that the insurance product offered in this case had, at best, ‘moderate’ effects. Methodology Inspired by the theoretical view that risk management can improve production outcomes, as well as a substantial body of evidence suggesting that rainfall risk is important to farmers, this eight-year-long study evaluates the impact of a new financial product, rainfall index insurance, on farmer investment behaviour in Gujarat, India. The Self Employed Women’s Association, a local non-profit organisation, introduced rainfall insurance to 52 randomly selected villages in the Ahmedabad, Anand and Patan districts. A control group, consisting of 48 villages in the same districts, was not offered rainfall insurance. Within the treatment villages, information and incentives affecting insurance take-up were randomly varied at the household level. Annual household surveys measured many variables that could have been impacted by access to or adoption of rainfall index insurance. This report focuses on effects on agricultural production decisions. Specifically, we estimate the effect of each additional ii unit of insurance coverage on total area cultivated, expenditures on agricultural inputs, the fraction of cultivated land devoted to high-yielding variety crops, the fraction of cultivated land devoted to cash crops, total agricultural revenues and agricultural profits. Among the differences between this study and other research, two are especially important. First, rather than providing free insurance coverage, we examine the effects on households who are close to the margin of insurance adoption. Given scarce public funds for agricultural risk management, these are the farmers most likely to be affected by modest, broad-based subsidies. The household-level random variation helps us understand the prospects for private index rainfall insurance markets. Second, insurance is sometimes described as ‘the most misunderstood industry’, and this project’s length provides an opportunity for the measurement of impacts after farmers have had a chance to achieve a greater understanding of its ramifications. iii Contents Acknowledgements ........................................................................................................ i Summary ........................................................................................................................ ii List of figures and tables .............................................................................................. v Abbreviations and acronyms ...................................................................................... vi 1. Introduction ............................................................................................................... 1 2. Rainfall insurance ..................................................................................................... 4 3. Experimental design ................................................................................................. 5 4. Effects on investment and agricultural outcomes .................................................. 8 4.1 Data ..................................................................................................................... 8 4.2 Empirical strategy ................................................................................................ 9 4.3 Results .............................................................................................................. 12 5. Effects on financial activity, consumption and welfare ....................................... 25 5.1 Data ................................................................................................................... 25 5.2 Empirical strategy: overview .............................................................................. 30 5.3 Results .............................................................................................................. 31 6. Conclusion .............................................................................................................
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