Crop index insurance as a tool for climate resilience: lessons from smallholder farmers in Nigeria

Abstract

Crop farmers in arid and semi-arid regions face a covariate risk that is of paramount importance, namely, the threat of catastrophic crop loss triggered by natural disasters and climate hazards. Such an occurrence not only jeopardizes the livelihoods of these farmers but may also lead to persistent poverty. Promoting sustainable development requires control over climate-related shocks, which negatively affect the most vulnerable population in the developing world. This study investigates the option of choosing crop area-yield index insurance to mitigate the adverse effects associated with climate stress. In addition, we assessed the amount farmers are willing to pay for an insurance product that insures yields below 70% of the local average in the study area. Our results show that access to extension services and economic association membership offers farmers social capital and encourages their decision to purchase index insurance. We also find that the long-run welfare impact of index insurance policy on vulnerable households could be significant as an alternative insurance mechanism to traditional insurance. This study contributes to filling the gaps on the uptake of index insurance and provide guidance to policymakers in their approach to mitigating the effects of climate change on crop production in Nigeria.