Introduction
Agricultural risk is associated with undesirable effects that arise due to imperfectly predictable biological and non-biological factors which are normally beyond the control of the farmers. Such may include sporadic outbreak of new pests and diseases, adverse climatic conditions like drought, flood, storm and frost. In addition, others may include or can be classified as resource risks like lack of farm inputs and credit access, poor markets, plummeting of producer prices, un-cushioned input cost fluctuations, destruction of property and loss of lives among farming households. Thus, it is perturbing that the agricultural sector is vulnerable to many risks and uncertainties. As a remedy there is emergence of weather index insurance …show more content…
According to World Bank (2011) certain behavioural and institutional reasons are also causes of the slow uptake of index based insurance because of farmers pursuing other informal risk sharing arrangements. Others reasons are attributed to significant basis risk , limited perils, lack of technical capacity, expertise, and data (International Fund for Agricultural Development and World food programme, …show more content…
Skees, 2008). In addition, traditional agricultural insurance schemes face financial challenges because of high administrative and operational costs, adverse selection and moral hazard problems (Kang, 2007) that are caused by the prevalence of asymmetric information. According to Skees (2008) the impact of weather risk on agricultural enterprises and rural households is real however, individuals suffer because development of insurance is hampered by enormous transactional costs and information asymmetry. Index based insurance thus provides an alternative risk-reducing tool with the potential to alleviate the financial effects of adverse weather (Banerjee & Berg, 2012) which to a large extent affect the smallholder farmers attitudes towards agricultural insurance. The index-based insurance though, is subject to salient limitations like basis risk, however, it can provide a less-costly and more-transparent risk management option than other alternative products, hence enabling farmers to make more-productive investments and better manage consumption risk (Cole et al.,
Agricultural risk is associated with undesirable effects that arise due to imperfectly predictable biological and non-biological factors which are normally beyond the control of the farmers. Such may include sporadic outbreak of new pests and diseases, adverse climatic conditions like drought, flood, storm and frost. In addition, others may include or can be classified as resource risks like lack of farm inputs and credit access, poor markets, plummeting of producer prices, un-cushioned input cost fluctuations, destruction of property and loss of lives among farming households. Thus, it is perturbing that the agricultural sector is vulnerable to many risks and uncertainties. As a remedy there is emergence of weather index insurance …show more content…
According to World Bank (2011) certain behavioural and institutional reasons are also causes of the slow uptake of index based insurance because of farmers pursuing other informal risk sharing arrangements. Others reasons are attributed to significant basis risk , limited perils, lack of technical capacity, expertise, and data (International Fund for Agricultural Development and World food programme, …show more content…
Skees, 2008). In addition, traditional agricultural insurance schemes face financial challenges because of high administrative and operational costs, adverse selection and moral hazard problems (Kang, 2007) that are caused by the prevalence of asymmetric information. According to Skees (2008) the impact of weather risk on agricultural enterprises and rural households is real however, individuals suffer because development of insurance is hampered by enormous transactional costs and information asymmetry. Index based insurance thus provides an alternative risk-reducing tool with the potential to alleviate the financial effects of adverse weather (Banerjee & Berg, 2012) which to a large extent affect the smallholder farmers attitudes towards agricultural insurance. The index-based insurance though, is subject to salient limitations like basis risk, however, it can provide a less-costly and more-transparent risk management option than other alternative products, hence enabling farmers to make more-productive investments and better manage consumption risk (Cole et al.,