Willingness to pay for Rainfall based Insurance by Smallholder Farmers in Central Rift Valley of Ethiopia: The Case of Dugda and Mieso Woredas

Current climate variability is already imposing significant challenge to Ethiopia. Therefore, farmers have faced income variability in almost every production season. Problems associated with dependence on rain fed agriculture are common in Ethiopia. Smallholder farmers’ vulnerability from such income variability is also common. Over the years, a range of risk management strategies have been used to reduce, or to assist farmers to absorb, some of these risks. Since insurance is potentially an important instrument to transfer part of the risk, this study try to describe the nature of weather related risks faced by smallholder farmers, assess small holder farmers willingness to pay for the rainfall risk insurance and examine factors that affect the maximum farmers are willing to pay for the rainfall risk insurance. The data was collected from 161 sample households from the two woredas of the study area using closed ended value elicitation format followed by open ended follow up questions. The study uses Logit model to estimate the mean willingness to pay in the close ended format in addition with Tobit model to examine factors that affecting small holder farmer willingness to pay as well as intensity of payment. The mean willingness to pay values are found to be 129.98 and 183.41 birr per hectare for the open and close ended formats respectively. The total willingness to pay for the study area was found to be birr 5,740,244 per year. The tobit model shows six potential explanatory variables affect the willingness to pay value. Income of household and ownership of radio have positive and significant effect on the value of willingness to pay, whereas off-farm income, age of household head, number of livestock owning and availability of public and private gifts have negative and significant effect on willingness to pay value. If the rainfall risk insurance premium is affordable and households have enough information about the service they are willing to pay for the service. Eventually policy makers need to be aware that socio-economic and institutional characteristics of households influence the willingness to pay for rainfall risk insurance services.