Weather-indexed insurance: an elusive or achievable adaptation strategy to climate variability and change for smallholder farmers in Ethiopia

Abstract

Smallholder farmers in Ethiopia largely depend on rainfed agriculture and they are highly vulnerable to climate change with few options to offset them. Adaptation to climate change requires innovative measures to be shared and adopted. This paper analyses willingness to pay (WTP) for rainfall-based index insurance by farmers in Ethiopia to shield against the adverse consequences of climate change. Rainfall data for the study area were used to compute Standardized Precipitation Indices to serve as drought monitoring tool and trigger response actions. A bivariate probit model was estimated to scrutinize factors associated with WTP. The results indicate that smallholder farmers associate positive value to indexed insurance. Those farmers in agro-ecology with moisture stress, who are better educated, worried about risk associated with weather and those who have better access to credit are more likely to pay for weather-indexed insurance. However, households that have better non-farm income and remittance are less likely to pay for the indexed insurance. The mean WTP was found to be Birr 119.90 per year for a hectare of maize-cultivated land. However, a number of challenges remain to be addressed for effective index-based insurance, which includes reliable weather data, strong marketing channel and intermediary for the insurance products. Therefore, any intervention which aims at transferring weather-based risks through rainfall index-based insurance need to consider the above features to identify the early adopters of the product.