Preferences for index-based pasture insurance : a choice experiment in Limpopo Province, South Africa

Abstract

South African subsistence livestock farmers rely heavily on traditional mitigation and coping mechanisms to deal with the effects of drought. However, these methods have proven ineffective in managing the full impact of drought. Consequently, policymakers are increasingly interested in promoting Index-based Pasture Insurance (IBPI). This paper aims to assess subsistence livestock farmers’ preferences for IBPI. A simple random sampling method was used to select 110 subsistence livestock farmers for data collection. A discrete choice experiment—Conditional Logit and Latent Class models and incentivized lottery games were used to elicit preferences for insurance contracts and loss aversion. The findings indicate that subsistence livestock farmers have a favourable attitude toward IBPI contracts that protect against drought-related pasture degradation. The Conditional Logit model shows that farmers prefer transparent contracts that reimburse with feed and vouchers rather than cash. However, they derive negative marginal utility from basis risk and premium. However, the Latent Class model reveals heterogeneous preferences for IBPI among farmers. Farmers are also loss-averse, but loss aversion did not influence their preference for IBPI. Therefore, the primary recommendation for insurance providers is to consider customizing IBPI attributes to increase adoption among subsistence farmers.