Can satellite-retrieved data increase farmers' willingness to insure against drought? - Insights from Germany

CONTEXT

As the demand for index insurance in Europe remains low, the use of satellite-retrieved data has received considerable research attention because it can reduce the basis risk, increase hedging effectiveness and thus potentially increase the attractiveness of index insurance to farmers. However, there is limited knowledge on farmers' demand and specific preferences for satellite-based index insurance.

OBJECTIVE

This study aims to obtain initial insights into farmers' preferences for satellite-based index insurance. In particular, farmers' overall preferences for satellite-based compared to precipitation-based index insurance are investigated. The objective is further deepened by investigating the effect of partially subsidizing index insurance. Finally, we focus on differences in preferences caused by the farmer's individual specific factors as this allows to identify the potential target groups for satellite-based index insurance.

METHODS

As satellite-based index insurance is still hard to find in Europe, a discrete choice experiment has been conducted with 127 German farmers. In a hypothetical scenario, farmers had to choose whether or not to insure themselves against drought by purchasing hypothetical index insurance products. Specifically, based on a labeled design, they had to choose between a satellite-based and a precipitation-based index insurance, or could choose not to use either alternative (opt-out). We include other insurance attributes such as premium, strike level and payout as they were rated as important by the farmers.

RESULTS AND CONCLUSION

Mixed logit model results show a preference for both index insurance products against no insurance. Particularly, the average farmer has a statistically significant higher preference for the satellite-based index insurance. In addition, subsidizing satellite-based index insurance has a higher effect on farmers' preferences. Moreover, the latent class model identifies heterogeneous preferences among farmers. Insurers can be advised to incorporate satellite data into the design of index insurance. By integrating them into existing index insurance products or by developing purely satellite-based index insurance, insurers could tailor index insurance better to farmers' preferences. Policymakers can be advised that farmers are differentially sensitive to subsidies. Especially farmers with a stronger preference for the satellite-based index insurance derive a huge increase in utility from subsidies.

SIGNIFICANCE

The study provides initial insights into farmers' preferences for satellite-based index insurance that can guide insurers regarding the design of index insurance products and give policymakers insights into how governmental support would change farmers' demand for index insurance.