Addressing Climate Change Through Risk Mitigation: Welfare Implications of Index Insurance in Northeastern Tanzania
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While index insurance offers a compelling solution to the problem of covariant risk among smallholder farmers in developing countries, most rainfall-based contracts suffer from poor quality due to a low correlation between the index and farmer losses. Moreover, a lack of historical household-level yield data has made it difficult to quantify the level of basis risk and the impact on farmer welfare. This paper utilizes a unique dataset of plot-level historical rice yields in Northeastern Tanzania to estimate the level of basis risk and the welfare implications of two hypothetical index insurance contracts. One is a standard area-yield contract, while the other uses an index based on publicly available high-resolution satellite data that are mapped to actual yields to minimize basis risk. Our results suggest that the satellite index explains approximately 55 % of the variation in zone-level yields across years. Moreover, despite the presence of large basis risk under both contracts, they are each found to improve the welfare of the average farmer in the sample. Finally, we show that the demand for satellite contracts may be as high as 30 % under reasonable assumptions about loading costs and risk preferences.
KeywordsAgriculture Basis risk Index insurance Microinsurance Remote sensing Tanzania
JEL ClassificationO10 O13 O16 Q14
We would like to thank Travis Lybbert, Stephen Boucher, Ghada Elabed, Jean Paul Petraud, Isabel Call, Wenbo Zou, Emilia Tjernstrom, Thomas Barre, Eliana Zeballos, Patrick McLaughlin, Jacob Humber, Asare Twum Barima and Abbie Turianski for their insightful comments and feedback. We are also grateful to VisionFund Tanzania and the enumerators, community leaders, and participants in our survey for their time and service. This research was made possible, in part, through funding provided by the U.S. Agency for International Development through the BASIS Assets and Market Access Collaborative Research Support Program.
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