Farmers’ demand for weather-based crop insurance contracts: the case of maize in south africa

Weather index-based crop insurance offers farmers a way to mitigate production risk without the moral hazard, adverse selection and high administrative cost problems that plague conventional loss-based crop insurance. This is especially important for developing countries that lack government subsidised crop insurance programmes and high quality yield records. In this paper, we analyse weather-based crop insurance theoretically and provide an empirical application to South African maize producers. We examine several weather indices, investigate the farmers’ demand with and without loaded premiums, and evaluate the benefits of weather index-based insurance to farmers with alternative risk preferences. Results show that the risk management efficiency of a contract has direct bearing on how well the index describes the production variability, especially a combination of two weather variables tend to describe production risk better than any single variable.