Do Farmers Value Insurance Against Extreme Droughts and Floods? Evidence from Odisha, India

Abstract

Crop insurance provides farmers with financial support and coverage in the event of extreme natural disasters. Despite more than two decades of disseminating the knowledge in India, crop insurance adoption rates remain low with evidence of dis-adoption. This article assesses farm households’ willingness to insure their crops as well as ability to pay for an insurance product designed to help rural Indian farmers manage flood- and drought-associated risks. The objective of this study is to assess the determinants of farmers’ participation in market-based agricultural insurance living in coastal and rainfed areas prone to risky weather. It is hypothesized that crop insurance would lead to less risk-averse behaviour and more efficient use of farm resources. Using probit model, the study highlights several determinants of willingness to insure and empirically verify the role of risk aversion in insurance purchase decisions. The lottery-choice experiment has been applied by the author for evaluating risk attitudes of sample household. Empirical results suggest that as regards farmers’ risk preferences, risk aversion actually plays an important role even though not directly but in interactive terms with expected losses which, in turn, significantly influencing farmers’ willingness to purchase the insurance product. The study underlines significant influence of insurance history on future crop insurance choice decision. Farmers’ insurance purchase history can help insurance companies, in order to devise effective crop insurance programmes in the future. Similarly, the study also foregrounds the significant role of insured amount in insurance contracts, influencing farmers’ crop insurance purchase decision in both rainfed and irrigated regions. It can therefore help insurance companies to revise the contract items or reform the existing subsidies. Finally, the study goes on to recommend the importance of the knowledge of informal risk management strategies followed by farmers before offering them the formal insurance product and the necessity of the insurance companies in understanding the farmers’ behaviour while designing the insurance product.