Abstract
BackgroundSmallholder 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.ResultsMany 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.ConclusionsBetter 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 policy-relevant insights into typical issues of WII in a small-farm context.
Highlights
Smallholder farmers in developing countries are vulnerable to climate shocks but often lack access to agricultural insurance
Discrete choice experiment We developed and used a discrete choice experiment (DCE) to evaluate subjective preferences of farmers for Weather index insurance (WII) contracts
Women tend to make less risky investment choices and are more vulnerable to weather-related risks [33]; they would have a stronger demand for WII compared to men
Summary
Smallholder farmers in developing countries are vulnerable to climate shocks but often lack access to agricultural insurance. Climate change will affect agricultural production through higher mean temperatures and more frequent weather extremes [1, 2]. Often located in the tropics and subtropics, smallholders are vulnerable to climate shocks, and they are usually ill-equipped to cope with risks [6]. Frequent weather extremes are associated with riskavoidance strategies, such as low uptakes of productivity-enhancing inputs and technologies [8]. Agricultural insurance could help, but is literally non-existent in most developing countries due to institutional constraints, including high transaction costs and issues of moral hazard and adverse selection [9,10,11]
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