Paper
Statistical Analysis of Rainfall Insurance Payouts in Southern India
Rainfall insurance payouts and their implications on households, financial institutions, and pricing
20 pages
This paper uses historical rainfall data to estimate distribution of payouts on a rainfall index insurance product offered to farmers in Andhra Pradesh, India. Through an empirical strategy, it draws on the observation that rainfall in the region is close to a stationary process. The analysis highlights that:
- Contracts primarily protect households against extreme tail events, insuring households against severe shocks, but create a skewed distribution of losses for the insurer;
- Balance sheet exposure can be partially offset through developing a diversified portfolio or by resorting to reinsurance;
- Half the expected value of indemnities paid by insurance are generated by only 2% of rainfall realizations;
- Contract payouts are significantly correlated cross-sectionally, and also inversely associated with real GDP growth.
The paper discusses implications of these findings for potential benefits of insurance to households, risks facing financial institutions underwriting rainfall insurance contracts, and pricing.
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