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From index to indemnity insurance using digital technology: Demand for picture-based crop insurance

Francisco Ceballos () and Berber Kramer

No 1890, IFPRI discussion papers from International Food Policy Research Institute (IFPRI)

Abstract: Production risk is pervasive in agriculture, yet smallholder farmers lack access to quality insurance. This is due to asymmetric information in markets for indemnity insurance, and high basis risk, limited trust, and poor understanding of index-based insurance. Digital technologies can help overcome these challenges by improving crop monitoring and yield prediction, allowing insurers to provide products that move towards indemnity insurance. Although this can potentially improve demand, it also comes at the risk of introducing adverse selection. We analyze this trade-off by eliciting willingness to pay for both index-based insurance and picture-based insurance (PBI) for visible crop damage through incentivized auctions with smallholder farmers in northwestern India. Participants reveal a higher willingness to pay for PBI than for index-based coverage. Although at commercial rates, demand remains low for either product, PBI improves demand at the subsidized premium levels maintained by India’s national insurance scheme. Moreover, we find no evidence of adverse selection. We conclude that digital technologies can facilitate a shift from index-based insurance to indemnity insurance. By reducing basis risk and strengthening trust and understanding, this can improve demand for crop insurance.

Keywords: INDIA; SOUTH ASIA; ASIA; willingness to pay; technology; crop insurance; mobile equipment; risk; mobile telephones; photography; insurance; assessment; innovation; losses; digital technology; mobile technology; adverse selection; G22 Insurance; Insurance Companies; Actuarial Studies; O13 Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Product; O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance; Q14 Agricultural Finance (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-agr, nep-ias, nep-pay and nep-rmg
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Handle: RePEc:fpr:ifprid:1890