Skip to main content

Why Index-Based Insurance Could Work

Author: Shardul Oza

A post by NYU researcher Jonathan Bauchet on the CGAP Microfinance Blog discusses some of the reasons behind the low takeup of microinsurance products.  Bauchet mentions results from CMF’s randomized controlled trial study of an index-based weather insurance product in rural Gujarat which show that price is a major barrier to adoption. (The studies, conducted in Andhra Pradesh and Gujarat, also find that trust and household liquidity constraints significantly impact takeup.)

He goes on to cite the promise of index-based insurance, new products which may help minimize the administrative and incentive problems associated with standard insurance programs. He writes:

New innovative insurance products carry high hopes for expanding insurance offerings and take up. “Index” insurance products rely on public events to trigger payouts rather than clients reporting a loss and starting a costly and typically lengthy claims verification process.
Read the Bauchet’s original post here.

How do index-based products solve incentive problems?

Since index-based products calculate payouts based on publicly observable events, insurance, purchasers cannot change their behavior to increase the chance that they will receive a payout (moral hazard). For example, a farmer who purchases crop insurance which insures him based on yield, may have an incentive to underinvest in his plots, since underinvesting will increase the probability that he will receive a payout. However, if he is insured based on a factor that impacts yield but that he cannot control (rainfall), he has less incentive to underinvest (in terms of time, labor or farm inputs).

While rainfall insurance is promising, researchers and practitioners must be able to a) design products that truly protect against crop losses and; b) market rainfall insurance effectively.

CMF, in partnership with several researchers based in the US, in is currently conducting two studies to assess the impact of weather insurance on low-income households and to better understand what factors impact takeup:

1) An long-term impact evaluation of index-based weather insurance in Gujarat
2) A study examining whether being informally insured through caste networks dampens the demand for formal insurance

To read about these studies and for more information on index-based products, please see our weather insurance web portal.


  1. This is a superb post Why Index-Based Insurance Could Work . I benefit from the knowledge lot. I will bookmark this page. show gratitude’s for sharing this information.


Post a Comment

Popular Posts

Vocationalisation of education in India: Current Scenario, Key Challenges and New directions

“Every handicraft has to be taught not merely mechanically as is done today, but scientifically. This is to say, the child should learn the why and wherefore of every process.” - Gandhi’s Philosophy of Education

The greatest challenge in Indian education system today is to provide skill based education to the youth. This is exacerbated by a mismatch in demand and supply for the skilled workforce. The penetration of vocational education and training remains poor not only in rural areas, but also in urban regions where there is a higher installed capacity to impart the same. This post is an attempt to make the readers understand the need of vocational education in India. Also, this is an attempt to summarise a few recommendations on the same. 
A recent survey (61st round) conducted by the NSSO found that:

1. The percentage of population that completed primary education was 70%, but less than 10% went on to complete a graduation course and above. Almost 97% of individuals in the age bracket…

Rockstar of Financial Inclusion: Business Correspondent Model of India

About Author:  Jatinder Handoo is a social business enthusiast and a branchless banking practitioner. Currently works at FINO PayTech Ltd and is based out of Mumbai. He is reachable at
India is a hot bed of financial exclusion. A country which houses nearly 16% of the global population  has more than 65% of its people outside the formal financial system (Global Findex 2012). The Indian banking system has adopted multiple approaches to make universal financial inclusion a reality right from early days Indian post-independence banking system. Be it bank nationalization in 1969 or formation of Regional Rural Banks. Formation of NABARD or fostering microfinance through Bank-SHG linkage programme in early 90’s. A shimmering ray hope was rekindled with the growth of JLG based microfinance, however later studies made it clear that the model is credit led, concentrated predominately in the southern region of India thus could not be seen as painting complete financial…

A Platform for Knowledge - Enabling people to learn ..

I received a rather interesting link/website via my email today. The link read as MR University and all I could think of was, "Ok, this must be another website portal of some university or college". Well, on clicking the link and looking through the contents of the site, I was pleasantly surprised. The site is an online education portal or platform that allows users or teachers to upload short videos on topics or lessons they wish to impart. First topic that I come across is Development Economics.
The intent of the website is eloquently put out by the two economists, Tyler Cowen and Alex Tabarrok in the intro video. What started as a blog focusing on economics and its various implications in understanding why things are the way they are around us, has now an interesting addition. A video portal titled MRUniversity or Marginal Revolution University that focuses on online education with subjects pertaining to economics. It brought back to my mind,…