Background: Smallholder farmers in developing countries are particularly vulnerable to climate shocks but often lack access to agricultural insurance. Weather index insurance (WII) could reduce some of the problems associated with traditional, indemnity-based insurance programs, but uptake has been lower than expected. One reason is that WII contracts are not yet sufficiently tailored to the needs and preferences of smallholder farmers. This study combines survey and choice-experimental data from Kenya to analyze the experience with an existing WII program and how specific changes in the contractual design might encourage uptake.Results: Many smallholders struggle with fully understanding the functioning of the program, which undermines their confidence. Regular provision of relevant rainfall measurements and thresholds would significantly increase farmers' willingness to pay for WII. Mechanisms to reduce basis risk are also positively valued by farmers, although not to the same extent as higher levels of transparency. Finally, offering contracts to small groups rather than individual farmers could increase insurance uptake.
Conclusions:Better training on WII and regular communication are needed. Group contracts may help to reduce transaction costs. Farmer groups can also be important platforms for learning about complex innovations, including novel risk transfer products. These concrete results are specific to Kenya; however, they provide some broader policyrelevant insights into typical issues of WII in a small-farm context.
Weather risk is a serious issue in the African small farm sector, which will further aggravate due to climate change. Farmers typically react by using low amounts of agricultural inputs. Low input use can help to minimize financial loss in bad years, but is also associated with low average yield and income. Increasing small farm productivity and income is an important prerequisite for rural poverty reduction and food security. Crop insurance could incentivize farmers to increase their input use, but indemnity-based crop insurance programs are plagued by market failures. This paper contributes to the emerging literature on the role of weather index insurance (WII). While a few studies have used experimental approaches to analyze WII impacts, research with observational data is scant. We use data from a survey of farmers in Kenya, where a commercial WII scheme has been operating for several years. Regression models with instrumental variables are used to analyze WII uptake and effects on input use and crop productivity. Results show that WII uptake contributes to higher use of chemical fertilizer and improved seeds, and thus also to higher yields. We conclude that upscaling WII programs may help to spur agricultural development in the small farm sector.
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