From Index to Indemnity Insurance Using Digital Technology: Demand for Picture-Based Crop Insurance

IFPRI Discussion Paper 1890, 2019

43 Pages Posted: 8 Jan 2020

See all articles by Francisco Ceballos

Francisco Ceballos

International Food Policy Research Institute (IFPRI)

Berber Kramer

International Food Policy Research Institute (IFPRI)

Date Written: December 16, 2019

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: willingness to pay, technology, crop insurance, mobile equipment, risk, mobile telephones, photography, insurance, assessment, innovation, losses, digital technology

Suggested Citation

Ceballos, Francisco and Kramer, Berber, From Index to Indemnity Insurance Using Digital Technology: Demand for Picture-Based Crop Insurance (December 16, 2019). IFPRI Discussion Paper 1890, 2019, Available at SSRN: https://ssrn.com/abstract=3505630

Francisco Ceballos (Contact Author)

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

Berber Kramer

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

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