Impacts of index insurance on agricultural investment by cotton farmers in Burkina Faso

An index-insurance based on area-yield was offered to (randomly chosen) groups of cotton farmers. The intervention was conducted during the 2014-2015 agricultural season (insurance was sold in May-June 2014) in the Houndé cotton region in South-West Burkina Faso.
The index is based on the yields obtained from the entire farmer group, and measured accurately by SOFITEX, the local cotton company that distributes cotton inputs and buys the groups' cotton production. The cotton insurance contract provides three levels of payment. When group yields are below 20% of the yield distribution (a one in five years event), farmers receive a “small payout” of 11,200 CFA per hectare insured. This insurance payment was designed to correspond to the value of the insurance premium (so that the premium is reimbursed to farmers in case of small shock in practice). When yields fall below 8% of the yield distribution, the insurance provides a “medium payout” of 34,000 CFA. Finally, in case of yields falling below 4% of the distribution (a 1 in 25 year event), the farmers receive a “big payout” of 90,000 CFA per hectare, which corresponds to the value of the input loan per-hectare.
The index insurance is built on a double trigger mechanism following the design by Elabed et al. (2013) in Mali. Farmers receive payments under two conditions. First, the farmer group yield needs to be below a given threshold corresponding to its category of yields (e.g., yields below 800 kg/ha). Second, the other farmer groups in the neighborhood need to be below a “neighborhood threshold” as well. This means that the other groups located in the same area (same village or neighboring villages) need to have somewhat low yields as well. The neighborhood condition was designed to avoid potential moral hazard issues, while still conditioning the payment on each group’s yield. Since farmers of a GPC live in the same village and are usually members of the same family, ethnic group or religious community, there were concerns of potential coordination within one farmer group. The neighborhood condition prevents such coordination by ensuring that yields are not particularly good in other groups in the area as well. The “neighborhood threshold” is higher than the own farmer group threshold (e.g., yields in the neighborhood needs to be below 1000 kg/ha).
The insurance contract is sold as part of the cotton credit package by the cotton company, SOFITEX, eliminating the need for farmers to finance the premium payment up-front.

2014-05-01

2015-08-31

Area planted in cotton and in other crops, input applications to cotton production and other crops, cotton yield, investment in agriculture, livestock holding.

The insurance intervention was randomized in two steps. First, half of the 80 cotton farmers' groups (GPCs) included in the study were randomly selected to be offered the insurance. Thus, the treatment area comprises 40 farmer groups, whereas the 40 farmer groups in the
control area could not purchase the insurance (insurance contracts were not generated for these groups to prevent from contamination entirely). Second, an encouragement design was generated among the treatment group by randomly distributing insurance subsidy coupons to farmer groups. Ten GPCs received no subsidy, ten a 25% subsidy, ten a 50% subsidy and ten a 75% subsidy.

Both randomization were done in office by a computer.

The unit of randomization was the group of cotton growers.

Yes

We included 80 farmers groups in the study.

About 13 farmers per group were surveyed, yielding a sample size of 1015 households.

40 farmers groups were offered the insurance (treatment) and 40 groups were not offered the insurance (control).