First, the demand for insurance in rural economies is complex and not well understood. Rural households face a number of significant risks, one of the most important being crop failure from drought or excessive rain. When these events occur, common coping mechanisms such as informal insurance, credit or increased labor supply are not effective because the shock adversely affects all households in a given region. In theory, these households can obtain insurance for weather-related shocks by accessing larger financial markets. A structural model of insurance demand can help predict the impact of creating and distributing microinsurance products. In particular, such a model can answer important counterfactual analyses with respect to the role of financial literacy in insurance demand.
Second, our field experience to date suggests that the traditional rainfall insurance product should be augmented to appeal to a wider variety of poor families in rural India. For our pilot study, we explore the potential of a weather-indexed savings account.