Agricultural Insurance in Developing Countries: An Introduction and a Case Study in Tamil Nadu, India

This study states that index-based insurance for the poor is not always an appropriate solution, and insurance solutions for the poor need to be customized to fit their specific needs. Traditional schemes are thought to be infeasible in developing countries. Although, experts suggest index-based insurance as the solution, the following case study aims to demonstrate that it is not always appropriate. The study examines the development of an insurance scheme to protect groundnut farmers in Tamil Nadu, India, against yield losses, using both traditional and index-based solutions. Findings indicate that it was not possible to design a simple weather index that sufficiently reduced basis risk. On the contrary, a scheme designed in the traditional way, based on assessment of actual losses, succeeded. The traditional scheme made use of small mutual pools and loss assessment performed by local farmers. The paper concludes that the success of the traditional scheme demonstrates that local conditions are of vital importance for the insurance solution to be chosen. Microinsurance solutions need to be tailor-made to the local conditions and clients needs.