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

Abstract

The impact of climate change intensifies drought risk, severely threatening subsistence farmers in developing countries. To deal with the effect of drought, subsistence farmers rely heavily on traditional mitigation and coping mechanisms; however, they are proved inefficient in dealing with the complete impact of drought. In this view, policymakers are increasingly interested in promoting Index-based Pasture Insurance (IBPI). This study’s main objective is to assess the preferences of subsistence livestock farmers for IBPI. A discrete choice experiment approach and other survey methods (incentivised lottery games and self-reported risk preferences based on a Likert scale) were used to elicit preferences for insurance contracts, farmers' risk tolerance, and loss aversion. Data collection covered 110 subsistence livestock farmers identified using a simple random sampling method. Results show that sampled subsistence livestock farmers have a positive attitude towards IBPI contracts that hedge against drought-related pasture degradation. The conditional Logit (CL) model shows that farmers derive positive marginal utility from contracts that reimburse with feed and vouchers relative to cash and prefer transparent contracts. They also derive negative marginal utility from basis risk and premium as expected. At the same time, Latent Class (LC) model shows that farmers exhibit heterogeneous preferences for IBPI. Furthermore, farmers are loss-averse and medium risk-averse; however, loss aversion and risk-aversion did not significantly influence farmers' preference for IBPI. Therefore, the main recommendation for insurance providers is to consider the customisation of identified IBPI attributes when designing IBPI schemes to increase the likelihood of adoption by subsistence farmers.