Agricultural Risk Management Options, Willingness to Adopt Agricultural Insurance and Pricing Of Rainfall-Indexed Insurance

Abstract

This study examines the risks facing crop farmers and the strategies they employ to mitigate those risks. It further sets out to determine whether crop farmers are willing to adopt agricultural insurance as a means of mitigating farm income variability, formulate a derivative measure to determine pure premium of a rainfall-indexed insurance contract and to investigate how much farmers are willing to pay for such a contract. Using a questionnaire, data on farmers’ demographics and farm characteristics were collected from 300 randomly selected farmers and used to examine the risks they face, the strategies they employ, and to determine farmers’ willingness to adopt agricultural insurance using a binary logistic regression model. Annual rainfall and yield data for the period of 2000 to 2015 were also used to formulate a derivative pricing measure for rainfall-indexed insurance. The study found drought, storm and pests as the most pervasive risks that affect farmers’ yield and farm income stability. Also, mixed cropping, use of improved seeds, timing planting, mixed farming, farmer cooperatives, engagement in other off-farm economic activities and seasonal migration were found as the means by which farmers mitigate the agricultural risks they face. Again, the study found that coefficient of variation of farm income positively and significantly affects willingness to adopt agricultural insurance. Female farmers and married farmers were also found more willing to adopt agricultural insurance. Farm size, land occupancy status, off-farm engagement and level of education positively impact on willingness whereas years of farming experience also negatively impact on willingness but were all statistically significant. Furthermore, 90% of the farmers are willing to adopt agricultural insurance and savour premium rate of 10% or below. The findings suggest that there is an available market for Ghanaian insurers to utilize and should therefore take advantage of the opportunity. Also, variation in farm incomes, gender and marital status of farmers be considered in designing insurance contracts and in targeting clients for their uptake. Moreover, the premium rate should also be considered since a rate higher than 10% could affect farmers’ willingness to adopt agricultural insurance.