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

Abstract

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.

Explorations in the Environment–Development Dilemma

“…Adaptation in an African context may be achieved by different means: expanding irrigation infrastructures, adopting crop and animal varieties that are more resistant to arid environments, providing infrastructure that relaxes access constraints for crucial inputs or to output markets, as well as efficient devices for the transfer of agricultural weather related risks. Leblois et al (2013) and Di Falco and Veronesi (2013) provide two complementary contributions on climate change adaptation in SSA contexts. Leblois et al (2013) focus on the provision of risk insurance mechanisms that capture more accurately the characteristics of SSA countries.…”

“…Leblois et al (2013) and Di Falco and Veronesi (2013) provide two complementary contributions on climate change adaptation in SSA contexts. Leblois et al (2013) focus on the provision of risk insurance mechanisms that capture more accurately the characteristics of SSA countries. The main challenge in this respect is that usual agricultural insurance schemes cannot be implemented in the SSA context, characterized by asymmetric information and high transaction costs.…”

“…Such an innovation in risk transfer is thus crucial in unravelling the environment-development dilemma, but the existent experience is still too crude and too narrow. Leblois et al (2013) adds to this strand of literature, by addressing methodological issues in the implementation of weather index insurance devices. For instance, implementation of weather index insurance requires detailed data; for example, average (village) level data are sensitive to income distribution and may hide high inter-individual variations in crop yields.…”

“…For instance, the authors find that weather-based insurance generates benefits when agricultural producers have a rather high risk-aversion, a result that still holds if fertilizers' decisions are taken into account. According to Leblois et al (2013), solving for the environmentaldevelopment dilemma as illustrated by the provision of weather based insurance may deliver less clear-cut results than expected. In particular, their conclusions are in line with other papers emphasizing detrimental effects of such promising devices (see e.g.…”

“…Contrary to the prospective approach adopted by Leblois et al (2013); Di Falco and Veronesi (2013) provide a retrospective assessment of climate change adaptation. Indeed, policymakers need feedback on adaptation strategies that are currently implemented by agricultural producers who are already being impacted by climate change.…”