Climate-Indexed Insurance as a Climate Service to Drought-Prone Farmers: Evidence from a Discrete Choice Experiment in Sri Lanka

  • D. V. P. PrasadaEmail author
Part of the Climate Change Management book series (CCM)


The droughts of 2016–2017 caused nearly 25% reduction in harvest and nearly 30% reduction in the area cultivated in Sri Lanka. As a result, renewed attention is being paid to farmer income smoothing and adaptation strategies, among which insurance contends as one of the more viable solutions. This study assesses the willingness to pay for a climate-indexed agricultural insurance package through a discrete choice experiment. We use the ‘stated preference’ approach by offering farmers choice scenarios constructed as a fractional-factorial assignment. The attributes include the coverage area for weather index calculation (village, divisional-secretariat area, or district), the managing authority for the insurance scheme (government, a commercial bank, or an agribusiness company), the method of calculation of compensation (fixed rate, based on cost of inputs or based on the value of output/revenue) and the premium per term (at three levels). We analyzed a total of 2583 choice scenarios evaluated by 287 individuals using a conditional-logit model and estimated the ‘marginal willingness to pay’ (MWTP) for each attribute. The results of the choice experiment reveal the following. The smaller-sized administrative area level is preferred by respondents as a reference area for weather-index calculation while the government is preferred as the managing authority. The revenue-based compensation approach is preferred as the method of calculating compensation. Negative MWTP was observed for larger area indices and for insurance administered by an agribusiness company. The MWTP for revenue-based compensation is LKR 326 while the MWTP for fixed rate compensation schemes is LKR -420.


Indexed-insurance Choice experiment Willingness to pay Sri Lanka 


  1. Agrarian and Agricultural Insurance Board of Sri Lanka (AAIB) (2015) Annual report. Agrarian and agricultural insurance Board of Sri Lanka, ColomboGoogle Scholar
  2. Barnett BJ, Mahul O (2007) Weather index insurance for agriculture and rural areas in lower-income countries. Am J Agr Econ 89(5):1241–1247CrossRefGoogle Scholar
  3. Boucher S, Carter M, Guirkinger C (2008) Risk rationing and wealth effects in credit markets: implications for agricultural development. Am J Agr Econ 90(2):409–423CrossRefGoogle Scholar
  4. Chantarat Sommarat, Mude Andrew G, Barrett Christopher B, Carter Michael R (2013) Designing index-based livestock insurance for managing asset risk in northern Kenya. J Risk Insur 80(1):205–237CrossRefGoogle Scholar
  5. Cole S, Giné X, Tobacman J, Topalova P, Townsend R, Vickery J (2013) Barriers to household risk management: evidence from India. Am Econ J Appl Econ 5(1):104–135CrossRefGoogle Scholar
  6. Elabed G, Bellemare MF, Carter MR, Guirkinger C (2013) Managing basis risk with multiscale index insurance. Agric Econ 44(4–5):419–431CrossRefGoogle Scholar
  7. GFCS (Global Framework for Climate Services) (2017) World Climate Conference3 (WCC-3). Downloaded 3 Aug 2018
  8. Hill RV, Hoddinott John, Kumar Neha (2013) Adoption of weather-index insurance: learning from willingness to pay among a panel of households in rural Ethiopia. Agric Econ 44(4-5):385–398CrossRefGoogle Scholar
  9. Liesivaara P, Myyrä S (2014) Willingness to pay for agricultural crop insurance in the northern EU. Agric Financ Rev 74(4):539–554CrossRefGoogle Scholar
  10. Marr A, Winkel A, van Asseldonk M, Lensink R, Bulte E (2016) Adoption and impact of index-insurance and credit for smallholder farmers in developing countries: a systematic review. Agric Financ Rev 76(1):94–118CrossRefGoogle Scholar
  11. McFadden D (1974) Conditional logit analysis of qualitative choice behavior. Front Econometrics 105–142Google Scholar
  12. Panabokke CR (1996) Soils and Agro-ecological environments of Sri Lanka. Natural Resources Series—No. 2. Natural Resources, Energy and Science Authority, 47/5, Maitland Place, Colombo 7Google Scholar
  13. Panda A, Sharma U, Ninan KN, Patt A (2013) Adaptive capacity contributing to improved agricultural productivity at the household level: empirical findings highlighting the importance of crop insurance. Glob Environ Change 23(4):782–790CrossRefGoogle Scholar
  14. Rosenzweig MR, Binswanger HP (1993) Wealth, weather risk and the profitability of agricultural investment. Econ J 103:56–78CrossRefGoogle Scholar
  15. Sandaratne N (1974) Using insurance to reduce risks in peasant agriculture. The Agricultural Development Council, U.S.A.Google Scholar
  16. Tadesse MA, Shiferaw BA, Erenstein O (2015) Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa. Agric Food Econ 3(1):26CrossRefGoogle Scholar
  17. Vaughan C, Dessai S (2014) Climate services for society: origins, institutional arrangements, and design elements for an evaluation framework. WIREs Clim Change 5:587–603CrossRefGoogle Scholar
  18. Wairimu E, Obare G, Odendo M (2016) Factors affecting weather index-based crop insurance in Laikipia County, Kenya. J Agric Extension Rural Dev 8(7):111–121Google Scholar
  19. Wollni M, Fischer E (2015) Member deliveries in collective marketing relationships: evidence from coffee cooperatives in Costa Rica. Eur Rev Agric Econ 42(2):287–314CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2020

Authors and Affiliations

  1. 1.Department of Agricultural Economics and Business Management, Faculty of AgricultureUniversity of PeradeniyaPeradeniyaSri Lanka

Personalised recommendations