Innovative Alternatives for Crop Insurance: Rainfall-Index-Based Insurance and Futures

Abstract

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For mitigating the rainfall risk, there is a need to create hedging opportunities which may provide comprehensive relief to farming communities and other sectors. Crop insurance is one such programme currently being implemented by Government of India. A good number of studies have provided enough evidence of poor performance of crop insurance programme due to factors like delay in compensation, moral hazard, high transaction cost and lack of product knowledge. This paper attempts to reinforce the need for creating rainfall risk market in India to complement the rainfall-index based insurance. The discussion is focused on the development of a new set of rainfall indices. The proposed Deficit Rainfall Days (DRDs) and Excess Rainfall Days (ERDs) indices are different from rainfall indexation attempted by National Commodity and Derivative Exchange (NCDEX) in 2005. Rainfall-index based insurance programme introduced in India in the recent past has met with limited success. By comparing Rainfall-Index Based Insurance with Rainfall-Index Based Futures, the study highlights the necessity and significance of Rainfall Futures to create rainfall risk hedging opportunities for a wide range of stakeholders, particularly farming community.

Keywords: Rainfall-Index-Based Insurance, Rainfall-Index-Based Futures, Sustainable Risk Markets

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