What drives the willingness to pay for crop insurance against extreme weather events (flood and drought) in Pakistan? A hypothetical market approach

Abstract

Pakistan has become a poster child for extreme weather events such as floods and droughts in recent years. The frequency and severity of these events are expected to increase in the future due to predicted climatic changes. This scenario suggests the likelihood of increased crop damage in flood- or drought-prone areas, and hence the need for risk-reducing mechanisms. This paper attempts to determine whether crop insurance is an acceptable tool against flood and drought events in rural Pakistan. It also analyses the factors influencing a farmer's willingness to pay insurance premiums. In a rural farm-household survey, farmers were asked about their willingness to pay for a hypothetical crop insurance programme employing a “double-bounded dichotomous contingent valuation method”. The results revealed that around 30% of the respondents accepted the idea of crop insurance as a tool to reduce and mitigate the financial risks associated with floods and droughts. Our findings suggest that the frequency and severity of the previous weather-related extremes, socio-economic settings, farm typology and the farming communities’ ability to pay need to be taken into consideration when introducing crop insurance programmes against flood or drought in Pakistan. Furthermore, disseminating awareness among farming communities about the future climatic changes and the associated risks of the occurrence of extreme weather events is imperative. The government's willingness to share/subsidize insurance premiums may increase the demand for crop insurance among smallholders in Pakistan and protect them from the negative repercussions of these extreme weather events in order to sustain their livelihoods.