Smallholder livestock farmers’ willingness to buy index-based insurance in South Africa : evidence from Ngaka Modiri Molema District Municipality, North West Province

Abstract

Livelihoods of rural households in developing countries are threatened by climatic risks. The poor and vulnerable agricultural households, who are generally subsistence farmers, feel the most intense effects of these risks. Farmers, in their attempt to cope with climate variability, have adopted a number of coping strategies. However, these coping strategies often prove to be ineffective. Financial instruments like insurance facilities can help cushion farmers against these risks. The challenge, however, is that insurance markets are underdeveloped and often non-existent in low income countries mainly due to problems of adverse selection, moral hazards, high monitoring and administration costs. For this reason, one innovation, known as index based insurance (IBI), has attracted significant consideration to help farmers better adapt to climate change. Several countries in Africa have implemented the use of IBI. However, South Africa, despite the available evidence of farmers affected by natural risks is yet to introduce IBI. Furthermore, apart from attempts to study the possibility of introducing IBI in South Africa, no empirical evidence has been provided on the acceptability of index based insurance by local farmers who happen to be the key stakeholders in such interventions. To this end, the study investigated the smallholder farmers’ willingness to buy IBI, identified livestock farmers’ perception on sources of risk and their managerial responses and examine factors underlying farmers’ willingness to buy IBI. The used data was collected from Ngaka Modiri Molema district municipality with a sample of 330 livestock farmers collected through the use of a questionnaire survey. To elicit farmers’ willingness to buy IBI, farmers were given a brief background of the concept before there were asked if they would be willing to buy IBI or not. About 14.55% of the sampled farmers were not willing to buy index based insurance. A larger proportion of 85.45% was willing to buy index based insurance of whom 65.45% were less willing, while 13.64% and 6.36% were moderately and more willing, respectively. Farmers’ perception on sources of risk and their managerial responses to risk were identified through the use of Principal Component Analyses. Ordered logistic regression model was used to examine factors influencing farmers’ willingness to buy IBI. The results revealed that farmers’ willingness to buy IBI was significantly associated with age of household head, gender of household head, education level, dependency ratio, the extent of livestock diversification, household size, land tenure, experience of loss, financial and marketing risks, elimination of government support and sources of income. Further insight into the factors influencing farmers’ willingness to buy IBI stands to benefit policy makers, current, and prospective insurance providers in their design for IBI. Based on the conclusion drawn from the study, it is recommended that the government should make an effort to sponsor IBI under the provision of a subsidy, workshops and surveys that focus on the elements of trust in the designing and implementation of IBI should take place and that greater priority should be in promoting programs to better educate farmers on how to assess risk management tools.