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Why didn't I get a payout? Understanding Farmer Decision Making, Index Insurance, and Basis Risk

Authors: S. Lucille Blakeley*, University of California, Stuart Sweeney, University of California, Santa Barbara, Daniel Osgood, International Research Institute for Climate and Society, Columbia University
Topics: Development, Africa, Economic Geography
Keywords: index insurance, farmers, agriculture, development, risk management
Session Type: Paper
Presentation File: No File Uploaded

Farmers around the world are already purchasing index insurance, a type of insurance that pays out based on a weather indicator. Index insurance offers the promise of improv- ing livelihoods through taking productive risks by offering a security net during bad years. Although index insurance may allow for productive risks and improved livelihoods, the threat of basis risk could potentially make index insurance less desirable. Basis risk is the possibility that a payout may not match the losses experienced by the farmer, resulting in a loss felt twice by the farmer. There is evidence that education, particularly financial education, can significantly impact the take-up rate of insurance (Gin ́e et al., 2007), and that trust between purchasers and partners can drive demand (Vasilaky et al., 2015). This research explores how index insurance education impacts investment in insurance in a purchasing simulation, and includes teaching basis risk to the treatment group but not the control group. This study aims to understand how farmers make risk management decisions with specific training on index insurance and basis risk.

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