Farmer Risk Perception and Crop Insurance Uptake in India

Despite substantial government subsidies, the uptake of crop insurance in India remains low. This study examines how farmers’ risk perceptions influence their crop insurance adoption decisions and assesses the impact of insurance participation on paddy income. Using an endogenous switching regression model and a primary dataset of 3,000 randomly selected rice farmers from Odisha, India, the analysis reveals that drought is perceived as the most significant production risk, followed by floods and pest or disease outbreaks. Risk perception significantly and positively influences farmers’ decisions to purchase crop insurance. The estimated treatment effects reveal a positive and statistically significant impact of insurance adoption on paddy income, with heterogeneous effects across loss and no-loss subsamples. This heterogeneity reflects the presence of basis risk, especially under delayed, partial or non-settlement of claims, thereby weakening the income-smoothing role of insurance. Addressing basis risk through improved loss assessment and timely claim settlement mechanisms is essential for sustaining insurance uptake and encouraging adoption among farmers with lower perceived risk.