Revisiting the diversification and insurance relationship: Differences between on– and off-farm strategies

Abstract

Crop insurance is an important instrument for farmers to cope with climate risks. Yet, also, diversification plays a crucial role. The use of crop insurance and diversification is interrelated. For example, an increasing support and uptake of insurance solutions may discourage farmers to take diversification measures on the farm, given that they now have an insurance dealing with risks. This may have unintended consequences, such as biodiversity decline.We examine the relationships between seven different kinds of income diversification and the uptake of crop insurance. Theoretically, both substitutive and complementary relationships are possible. The reason is that, depending on their preferences and constraints, farmers choose income bundles that optimally balance profits and risks. Here we provide the first systematic empirical examination of this issue. Our analysis is based on our own survey data from 1176 Swiss fruit growers. We consider on– and off-farm diversification strategies, namely inter-varietal diversity, agro-tourism, processing and direct marketing of products, creation of financial reserves for bad times, forestry work, off-farm investment, off-farm income and their association with insurance uptake. In line with our theoretical reasoning, we do indeed find both substitutive and complementary relationships. In general, on-farm diversification is associated with positive insurance demand, whereas off-farm diversification has a negative association.