Agricultural Risk and Crop Insurance Coverage in India : Testing for Adverse Selection

Adverse selection occurs due to information asymmetry between the insurer and insured wherein those facing high risk opt for insurance while others do not. This raises the number of claims, increases the cost of insurance for the insurer and reduces the efficiency of the insurance programme. This paper attempted to assess the levels of agrarian risk and crop insurance coverage across 17 major states of India and evaluate for adverse selection by means of coverage-risk correlation. Results showed that levels of risk and coverage varied across states with high-risk states having a higher level of insurance coverage. Coverage-risk correlation yielded a coefficient value of 0.492. These findings therefore indicate the presence of adverse selection in Indian crop insurance market.