How Understanding Farmers Risk Preference Can Aid Insurance Providers to Scale Up Crop Insurance: An Experimental Risk Study for Maize Farmers In Tanzania

Abstract

Godwin Stanslaus Kalokola*, Arbogast Moshi and Joel Johnson Mmasa

Demand for insurance can be driven by high risk aversion or high risk. That means risk-avoidant or risk-averse individuals have a high probability of purchasing crop insurance to protect against income loss caused by averse events such as drought, excessive rainfall, floods, windstorms, uncontrollable pests and diseases, and other production risks that are beyond farmers' control (Act of God). However, there are factors that affect individual risk preference that are important to understand in order to increase demand for crop insurance. A number of studies have been conducted to investigate factors affect individual farmers risk preference with the majority of researchers focusing on the social economic domain such as age, sex, income, farming size, and experience of farming to assess if those factors affect an individual's risk aversion. In filling that void, a risk experiment study understands the risk aversion of maize smallholder farmers and explore new factors that affect individual risk aversion was sought.The paper applies the Barsky–Juster–Kimball–Shapiro (BJKS1997) hypothetical income-gamble to 360 maize farmers in Kongwa District to classify individual risk preferences. A logistic regression then links risk aversion (binary) to seed type, farming purpose, perceived climate risk and expected monetary loss, controlling for demographic variables. Results show 83 % of farmers are risk-averse; farming purpose, high perceived climate risk and expected income loss significantly raise the odds of risk aversion, whereas seed type does not. The authors conclude that identifying these drivers can help insurers target products and raise crop-insurance uptake. The policy implication of this finding is about high probability of smallholder farmers in Tanzania to buy crop insurance as a resilience strategy as risk averse have high odd of being insured.

HTML PDF