Hot Stuff: Index Insurance for Indian Smallholder Pepper Growers

SummaryWe simulate the impact of a joint price and yield index insurance on the basis of a small representative panel data set of Indian smallholder pepper growers. Affordable and feasible index insurance reduces crop revenue risk to around 68% of its original level, while a reduction to 50% of this level can be achieved with ideal insurance. Basis risk is large for only a small fraction of farm households. Depending on risk aversion 5–30% of farm households is willing to pay for index insurance, increasing to 12–50% with a 50% premium reduction. Opportunity costs of consumption smoothing in the form of lower productivity levels suggest potential welfare gains of specialization with insurance.