Innovative Insurance Design that will Enhance the Role of Private Firms in Strengthening the Resilience of Rice Cultivation in Bangladesh to Climate Change

Climate change threatens food security and livelihoods of the most vulnerable population in Bangladesh by exposing crops to amplified weather ravages. Lack of adequate risk-sharing products means that farmers bear the financial burden of this exposure. This causes farmers to stick with inefficient low-risk, low-yield cultivation practices and, as a result, forego much higher potential yields when weather is favourable. This unmet demand has marked attention of private insurance companies in Bangladesh. Unfortunately, existing insurance products are either prohibitively expensive or do not provide accurate compensation for farmers’ losses, with the result that most farmers do not enrol in proffered insurance plans. These two deficiencies are interlinked: accurate compensation requires individualised coverage, but a case-by-case consideration is intensive and expensive to carry out. The researchers will formulate a practicable design of purely weather-contingent yet easily customisable insurance products for private insurers to offer to rice farmers in Bangladesh. The overall objective is to increase the role of private firms in: (i) strengthening Bangladesh’s adaptation and resilience to climate change by providing sorely needed risk sharing products to the most economically insecure segment of the population; and (ii) promoting the uptake of optimal and environmentally friendly cultivation practices via the insurance design.

The researchers aim to formulate and robustness-test viable and effective insurance products that private companies in Bangladesh could successfully provide. To achieve this, they will calibrate their theoretical model with data from the Bangladesh Integrated Household Survey – the country’s most comprehensive and nationally representative panel data on plot-level agricultural activities. This will produce the structural framework of farmer’s cultivation choices at each stage of crop growth as a function of realised weather and plot-specific timing of operations. To design and test insurance products for various alternative climate scenarios, the researchers will simulate daily rain and temperature realisations for South Asia for current and alternative climate scenarios for various future time periods. They will analyse and quantify the effects of distinct plausible choices by farmers on yields, as well as how alterations on insurance premium-payoff structure can nudge farmers towards specific choices, such as environmentally friendly practices.

This research is expected to inform policy by illuminating the costs of continuing existing practices and the benefits of encouraging the adaptation, via insurance design, of productivity-enhancing and environmentally friendly practices. In addition to having specific results for Bangladesh, the work will also inform discussion on policy and the role of private firms in promoting climate change resilience and adaptation via risk sharing in low-income countries more broadly.



Kamilya Tazhibayeva

Massachusetts Institute of Technology

Robert M. Townsend

Massachusetts Institute of Technology