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Submitted by XAVIER on
Dear Nachiket, Thanks a lot for the comment. I agree that there are instances when existing risk coping mechanisms can do a good job. For example, participation in NREGA program can provide some form of insurance for eligible households. Also, the state and central governments offer financial relief measures for borrowers from commercial banks and credit cooperatives. But rainfall insurance can actually be very valuable precisely because it provides a payout in situations where informal risk coping mechanisms will not work well. Take the 2009 Monsoon, for example. Rainfall insurance in the two districts in AP that we've been studying paid handsomely (up to Rs 1,000 for a policy that cost Rs 80), yet most farmers agricultural revenue was poor, so that their ability to help others was limited. At any rate, I'd be curious to see how you simulate farmer welfare under different weather patterns and your assumptions about available risk coping mechanisms they have access to. A key problem with rainfall insurance that we do not have a good handle on is basis risk, that is, the lack of correlation between what the farmer cares about, ie agricultural yields and the event being insured, ie rainfall at a nearby rainfall gauge. Basis risk can be high because the rains at the rainfall gauge differ from the rains at the farmer' plot or because the correlation between rain and yield is poor. Either way, the insurance product will be less desirable. We are starting some work to try to quantify the magnitude of basis risk, so any feedback on this will be greatly appreciated. As for tools, I know that colleagues at the bank and at IRI (U. Columbia) are developing a toolkit, but the focus is on insurance pricing, more than welfare calculations for farmers. I'll ask the details and report back.