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Smallholder access to weather securities: demand and impact on production decisions

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Weather-based insurance products insure farmers against production risks on the basis of a weather index that is highly correlated to local yields. Indemnifications are triggered by prespecified patterns of the index, as opposed to actual yields. This eliminates the requirement
of on-field assessments for indemnification, thereby lowering administrative costs and time.

Therefore, index-based insurance products have been regarded as having enormous potential to reach small farmers in developing countries. Surprisingly, the demand and takeup rates are low for weather index insurance (WII) products. One of the reasons hypothesised for the low demand and take-up of index-based insurance products is their
inherent complexity, which makes it difficult for farmers to perceive the direct benefits.

The main objective of this study was to assess the impact of the product (simplified WII) on the production and consumption behaviours of smallholder farmers. In addition to this, the research also investigated the responsiveness of insurance demand to a set of randomly allocated interventions among farmers who were offered insurance products.

The study seems to support the hypothesis that the purchase of WII could have influenced the farmers to use hybrid seeds or high-yielding varieties to cultivate increased areas, to cultivate new crops, to adopt improved cultivation practices and to get additional loans. However, these results are not statistically strong.

The insights gained from the study enable us to propose the following policy recommendations:

thin networks of weather stations restrict the demand and scale-up of WII
provision of weather data by the weather service providers to the insurers has to happen without any time lag to enable quick indemnification
distribution and marketing channels are key to enhance take-up and scale-up of WII programmes
an improved design of the WII product is key to minimise basis risk
affordability of WII insurance premiums is essential for a sustained take-up from smallholder farmers
one-time WII literacy programmes have little, if any, long-lasting impact on insurance understanding and demand. This suggests that WII literacy programmes should be designed as part of a more permanent process over time so they can contribute to developing more sustainable micro-insurance markets (although more rigorous evidence of this recommendation will require longer-term research projects than this one)