Does Crop Insurance Build Disaster Resilience? Evidence from Drought-Affected Smallholders in India

Abstract Crop insurance is increasingly promoted as a tool for enhancing disaster resilience among smallholder farmers facing climate-induced shocks. Yet empirical evidence on its effectiveness remains limited, particularly in low- and middle-income countries. This study investigates the impact of crop insurance on subjective household resilience in a drought-prone region of India using a three-period panel dataset. We construct a composite resilience index based on self-reported adaptive and coping capacities and apply a weighted Difference-in-Differences (DiD) approach combined with matching methods to estimate causal effects. Surprisingly, our findings indicate that insured households experienced a significant decline in perceived resilience over time, while uninsured households reported recovery and stronger adaptive perceptions. The Average Treatment Effect on the Treated (ATT) suggests a modest but statistically significant negative short-term impact of insurance on resilience. Field evidence highlights issues such as delayed payouts, low claim ratios, and institutional weaknesses that undermine insurance effectiveness as a disaster risk reduction mechanism. These results underscore the need to complement insurance schemes with timely delivery systems, livelihood diversification, and localized risk governance. This study contributes to DRR literature by integrating subjective resilience metrics and causal inference to assess the real-world performance of climate risk finance in vulnerable agrarian settings.