Journal Article
Understanding farmers' valuation of agricultural insurance

Agricultural index insurance offers smallholder farmers the potential to manage pervasive weather and environmental risks, and smooth income over time. Yet despite the potential benefits, take-up of index insurance has been largely disappointing.

We employ a novel approach to investigate the reasons for low demand and we confirm that farmers systematically undervalue agricultural index insurance. We find that access to private transfers acts as a substitute for insurance demand, while membership of a farmer’s union helps explain why farmers value index insurance.

Finally, we find that individual riskiness is positively related to willingness to pay for agricultural index insurance and interpret this as further evidence that, within the context of basis risk and lack of trust in insurers, farmers valuation of agricultural index insurance can be better understood through behavioural theories such as ambiguity aversion or prospect theory.