Making index insurance attractive to farmers

Patt, Anthony; Peterson, Nicole; Carter, Michael R.; Vélez, María Alejandra; Hess, Ulrich; Suarez, Pablo

doi:10.1007/s11027-009-9196-3

Cited by 82 publications

(46 citation statements)

References 53 publications

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“…This result confirms that information transparency and regular communication can increase farmers' confidence in WII products, which was also pointed out by [34]. Concerning distance to the weather station, where 5 km is the reference; the negative and significant coefficient for the 50 km alternative shows that farmers prefer shorter distances that are associated with lower basis risk.…”

Section: Choice-experimental Resultssupporting

confidence: 79%

“…Transparent communication could also help to reduce farmers' distrust in the insurance provider. While some experimental evidence on the importance of trust in micro-insurance uptake exists [21,33,34], the specific influence of insurer transparency on WII demand has never been researched. We use contract features related to distance and regular communication in our choice experiment.…”

Section: Introductionmentioning

confidence: 99%

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Small farmers’ preferences for weather index insurance: insights from Kenya

2018

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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.

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Section: Choice-experimental Resultssupporting

confidence: 79%

Section: Introductionmentioning

confidence: 99%

Small farmers’ preferences for weather index insurance: insights from Kenya

2018

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“…The trade-off, brought up by an emerging literature (Patt et al, 2009), between accuracy and simplicity of the index would suggest to use the most transparent index among indices reaching similar outcomes. We tested seasonal cumulative rainfall, the number of big rains (defined as superior to 15 and 20 mm.)…”

Section: Index Choicementioning

confidence: 99%

Weather Index Drought Insurance: An Ex Ante Evaluation for Millet Growers in Niger

Leblois

Quirion

Alhassane

et al. 2013

Environ Resource Econ

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In the Sudano-Sahelian region, which includes South Niger, the inter-annual variability of the rainy season is high and irrigation is scarce. As a consequence, bad rainy seasons have a massive impact on crop yield and regularly entail food crises. Traditional insurances based on crop damage assessment are not available because of asymmetric information and high transaction costs compared to the value of production. We assess the risk mitigation capacity of an alternative form of insurance which has been implemented in India since 2003: insurance based on a weather index. We compare the capacity of various weather indices to increase utility of a representative risk-averse farmer. We show the importance of using plot-level yield data rather than village averages, which bias results upward. We also illustrate the need for out-ofsample estimations in order to avoid overfitting. Even with the appropriate index and assuming a substantial risk aversion, we find a limited gain of implementing insurance, roughly corresponding to the cost of implementing such insurances observed in India. However, when we treat separately the plots with and without fertilizers, we show that the benefit of insurance is higher in the former case. This suggests that insurances may increase the use of risk-increasing inputs like fertilizers and improved cultivars, hence average yields, which are very low in the region.

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“…Along these lines, Odening and Shen (2014) stated that increasing the complexity of index insurance in order to reduce basis risk counteracts market acceptance due to the demand for easily understandable products (Odening et al 2007). Therefore, Leblois et al (2014a, p. 532) suggest using ''the most transparent index among indices reaching similar outcomes'' (see also Patt et al 2009). In contrast, WII uptake is also limited due to basis risk (Gine et al 2008;Elabed et al 2013 2 ).…”

Section: Literature Reviewmentioning

confidence: 99%

“…To overcome problems caused by asymmetric information associated with indemnity-based insurance solutions, index insurance products have been suggested as an alternative (Turvey 2001). These insurance solutions also have been discussed as a viable strategy for adapting to increasing climatic risks caused by climate change (Patt et al 2009). In contrast to traditional insurance products, the payout of index or parametric insurances does not depend on actual losses but on the performance of a predefined index or trigger value.…”

Section: Introductionmentioning

confidence: 99%

Can Gridded Precipitation Data and Phenological Observations Reduce Basis Risk of Weather Index–Based Insurance?

Dalhaus

Finger

2016

Weather, Climate, and Society

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Adverse weather events occurring at sensitive stages of plant growth can cause substantial yield losses in crop production. Agricultural insurance schemes can help farmers to protect their income against downside risks. While traditional indemnity-based insurance schemes need governmental support to overcome market failure caused by asymmetric information problems, weather index–based insurance (WII) products represent a promising alternative. In WII the payout depends on a weather index serving as a proxy for yield losses. However, the nonperfect correlation of yield losses and the underlying index, the so-called basis risk, constitutes a key challenge for these products. This study aims to contribute to the reduction of basis risk and thus to the addition of risk-reducing properties of WII. More specifically, the study tests whether grid data for precipitation (vs weather station data) and phenological observations (vs fixed time windows for index determination) that are provided by public institutions can reduce spatial and temporal basis risk and thus improve the performance of WII. An empirical example of wheat production in Germany is used. No differences were found between using gridded and weather station precipitation, whereas the use of phenological observations significantly increases expected utility. However, even if grid data do not yet reduce basis risk, they enable overcoming several disadvantages of using station data and are thus useful for WII applications. Based on the study’s findings and the availability of these data in other countries, a massive potential for improving WII can be concluded.

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Making index insurance attractive to farmers

Abstract: Index insurance, Smallholder farmers, Role-playing games, Climate variability, Climate adaptation,

Cited by 82 publications

References 53 publications

Small farmers’ preferences for weather index insurance: insights from Kenya

Small farmers’ preferences for weather index insurance: insights from Kenya

Weather Index Drought Insurance: An Ex Ante Evaluation for Millet Growers in Niger

Can Gridded Precipitation Data and Phenological Observations Reduce Basis Risk of Weather Index–Based Insurance?

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