Smallholder Farmers' Willingness to Pay for Crop Insurance: The Case of Dugda Distr ic t, East Shewa Zone of Oromia National Regional State
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Date
2012-09
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Addis Ababa University
Abstract
Agricultural risk plays an important role in human livelihood, particularly for third world
countries farmers are exposed to the vagaries of tragic crop failure. The most obvious aspect of
Ethiopian rural life is uncertainty, because of the country over dependency on climate sensitive
rain fed agricultural practice, geographical location, and low adaptive capacity making the
country highly vulnerable to the adverse impact of climate change. Risk management strategies
commonly used by smallholder farmers to minimize their exposure to crop production risk are
contemporary informal traditional ways. On the ground of the above problem by observing the
extent of smallholder farmers risk aversion behaviors and ability, designing and introducing
risk transfer approach such as crop insurance has the potential to contribute significantly to
sustainable development. However the program exist as a pilot project, there exist no crop
insurance program developed at national level to manage natural hazard risks for poor
smallholder farmers; Against this back log this study focuses on the assessment on farmers'
willingness to pay for crop insurance, identify determinants and investigates the willingness of
insurance companies to provide the crop insurance program. In the study, a Contingent
Valuation Method (CVM) elicitation technique was used because it utilizes surveys to determine
how consumers evaluate goods and services when markets are missing. The sample size of this
study is 120; proportional sample household heads were surveyed. For the coding and analysis
of the data collectedji-om the household survey, SPSS and STATA were used and analyzed using
descriptive statistics and logistiC regression model. The result depicts the willingness to buy for
crop insurance was found out to be very high accounting for 97. 5 % of farm household heads.
The high interest in the service can be due to high vulnerability of the area to different natural
disasters. Among those willing to buy, only 36.7 % of the household heads were able to afford
the premium. The mean of willingness offarmers to pay for the service was 3,502.25 Birr per
hectare per year which is very much lower than the demanded insurance set premium of 6, 000
ETB. The other remaining majority (63.3%) were not able to pay for the service. The logistic
regression result shows that wealth, educational level of household head, size of rain fed
cultivated land, knowledge and adaptive strategy positively determine farmers' partiCipation in
the service; whereas, age, dependency ratio, amount of premium set per hectare negatively
affects farmers' decision to participate in crop insurance. In addition when farmers know the
service being sold, they are more likely willing to pay. Nonetheless, participation of small holder
farmers in the crop insurance service greatly contributes to the improved production of crops,
facilitate access to credit and contribute for modernization of the crop production. Smallholder
farmers are increasingly showing higher willingness and participation and insurance companies
have interest of expanding the access to larger number of users. However, the insurance
companies proposed that to realize the implementation of effective insurance service; policy
implementation in crop insurance has to get attention ji-om the government side, and much work
has to be done in awareness creation. Crop insurance is perceived as a means by which ftlrmers
are helped increases their income and support to minimize poverty trap, for proper
implementation of the program in the study area priority should be given for essential
agricultural inputs, credit facility, capacity building and public intervention.
Key Words: Crop Insurance, Climate Change, WTP, CVM.
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Keywords
Crop Insurance, Climate Change, WTP, CVM