Extreme weather and demand for index insurance in rural India

Index insurance appeared recently in developing countries with the expectation to improve agricultural output and living standards in general. We investigate how experiencing extreme weather events affects farmers’ decision to purchase index insurance in India. Extreme weather events are identified from historical precipitation data and matched with a randomised household panel. Excessive rainfall in previous years during the harvest increases the insurance demand, while lack of rainfall in the planting and growing periods has no effect. The latter can be explained by access to irrigation, underscoring the importance of the local context when developing insurance products to accommodate environmental risks.