FARMERS’ WILLINGNESS TO JOIN AND PAY FOR WEATHER INDEX BASED CROP MICROINSURANCE: THE CASE OF SHASHEMENE DISTRICT FARMERS

Abstract

Ethiopia is one of the African countries frequently exposed to extreme drought causing severe crop failure and economic losses. Nonetheless, it is dominated by imperfect risk pooling mechanisms and self-insurance strategies which is costly to households. Very recently, some international NGOs in collaboration with financial institutions have initiated the product-Weather Index based Crop Insurance. However, the uptake rate is found to be very minimal and even some are terminated after pilot period. Similarly, commercial viability of the product is not yet driving the supply that is pioneered by some Insurance companies in the country. Study made on the demand side is seen scarce. This study deals with determinants of Willingness to Join (WTJ) and maximum Willingness to Pay (WTP) for Weather index based crop microinsurance. The study is conducted in Shashemene District, located in the rift valley. A sample of 150 sample smallholder Farmers engaged on maize production were selected and applied Double Bounded Dichotomous Choice Contingent Valuation Method to collect primary data. Heckman’s two-stage econometric estimation procedure is employed to identify the determinants. The findings of the study indicate that some 11 percent of the sample households prefer either to stay away from participating in microinsurance scheme or pay lesser amount of premium, while others (8 percent) do not want to pay as they understand that the service should be given by government or donors; and the mean WTP is below the current actuarial premium. Farmers are WTP, on average, 12.9 percent. Age, education and marriage status of household’s head, product literacy, trust in management of microinsurance program, being member of SHG/MFIs, using leased land for farming and initial bid are found to be significant in influencing both households’ decision making to choose the service and on determining maximum WTP. The findings of the study imply that the need for government and stakeholders’ effort towards farmers’ awareness and product literacy so that the current uptake rate improves. It also implies that policy on farm land leasing might have an important role on the product adoption rate.