TABLE OF CONTENTS
Content Page
Title page
i
Certification
ii
Dedication
iii
Acknowledgements
iv
Table of contents
v
List of tables
vii
Abstract
viii
CHAPTER ONE:
INTRODUCTION
Background
information
1
Problem
statement 6
1.3 Objectives of the study 8
1.4 Research hypotheses 8
1.5 Justification of the study 9
CHAPTER TWO:
LITERATURE
2.1 Conceptual
Literature
10
2.1.1 Agricultural
Insurance Purchase 10
2.1.2 Farmer’s awareness and Perception for
Insurance and risk 11
2.1.3 Farmers’ Willingness to Pay Insurance 13
2.2 Theoretical Framework 15
2.2.1 Decision-Making
Theory under Uncertainty
15
2.2.2 Under Expected
Utility (EU) Theory 15
2.2.3 State-Dependent Utility Theory 15
2.2.4 The Status Quo Bias Theory 16
2.2.5 Regret and
Disappointment Theories 16
2.2.6 Prospect
Theory 16
2.3 Different Insurance Mechanisms and Products
Used By Farmers 17
2.3.1 Factors
Influencing Farmers Willingness to Pay for Agricultural Insurance 19
2.3.2 Constraints Encountered By Farmers in
Purchasing Agric Insurance 20
2.4 Analytical
Framework. 21
2.4.1 Binomial
Logistic Regression
22
2.4.2 Likert Scale Rating 23
CHAPTER THREE:
METHODOLOGY
The Study Area
25
3.2 Sampling
Procedure
25
3.3. Data
Collection
26
3.5 Data
Analysis
26
3.5.2 Mean score 28
CHAPTER FOUR: RESULTS
AND DISCUSSION
4.1 Socio-Economic Characteristics of Rice
Farmers in Enugu State. 30
4.1.1: Gender of the
Rice Farmers
31
4.1.2: Age of the
Respondents
32
4.1.3: Marital
Status
32
4.1.4: Educational
Status
32
4.1.5: Household
Size
33
4.1.6: Farming
Experience 33
4.1.7: Farm Size
33
4.2: Farmers
Awareness, Perception of Agricultural Insurance and Risk Production 34
4.2.1: Farmers
Awareness of Agricultural Insurance 34
4.2.2 Sources farmers
awareness about the scheme 34
4.2.3: Perception of
farmers towards the Agricultural insurance scheme 35
4.2.4 Perception of
risk in rice production by farmers
37
4.3 Different
insurance mechanism and product 38
4.4 Determinants of
rice farmers’ willingness to pay for Agricultural insurance 39
4.4.1 Chi square
test
42
4.5 Constraints
encountered by rice farmers in participating in agricultural insurance 43
CHAPTER FIVE:
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary 46
5.2 Conclusion
47
5.3 Recommendations
48
REFERENCES
49
APPENDIX 60
LIST OF TABLES
Tables
4.1: Socio-Economic
Characteristics of rice farmers in the study area 30
4.2: Farmers
Awareness of Agricultural Insurance
34
4.3: Farmers sources
of information 35
4.4: Farmers
perception towards the scheme 36
4.5: Perception of
risk by sources
37
4.6: Formal insurance
mechanism 38
4.7: Informal
Insurance Mechanism
39
4.8: Determinant of
rice farmers’ willingness to pay for agricultural insurance 40
4.9: Chi Square result showing significant
effect between socio-economic and other factors of rice farmers and their
willingness to pay for agricultural insurance 43
4.10 Varimax Rotated component matrix on the
constraints faced by rice farmers in participating in agricultural
insurance 44
ABSTRACT
This study analyzed
the risk preference and insurance purchase by rice farmers in Enugu State.
Nigeria. This research is as a result of concentration of many studies on
agricultural insurance purchase, which centres on the analysis of risk
preference, awareness of insurance purchase by rice farmers with little
emphasis on the specific issues such as the different mechanisms and risk
preference of rice farmers especially in the study area. The aim of the study
was to analyse risk preferences and insurance purchase by rice farmers in Enugu
State, Nigeria. The specific objectives were to: examine the socio-economic
characteristics of rice farmers in the study area, examine the rice farmers’
awareness and perception of insurance and risk, identify the different
insurance mechanisms and products used by rice farmers, ascertain the
willingness of the rice farmers to pay for agricultural insurance and factors
that influence willingness to pay for insurance, and identify the constraints
encountered by rice farmers in participating in agricultural insurance in the
study area. The study used survey design which covered the three agricultural
zones of Enugu state. A three stage random sampling techniques was used to
select 140 rice farmers in Enugu State. The selection was based on prior
information from Enugu State Agricultural Development Project and national
agricultural insurance company. First,
four (4) Local Government Areas involved in rice productions was purposively of
five (5) farm communicates from each of the four (4) Local Government Areas,
Third, Seven (7) rice farmers were randomly selected from each Community making
a total of one hundred and forty (140) respondents. Primary and Secondary data
were used for this study. Primary and secondary Data were analyzed using
descriptive statistics and Binomial logit regression analysis. It was shown that
Majority (61.43%) of the rice farmers were male and many (42.14%) of them fell
within the age bracket of 31-40 years. About 56 percent of them married while
many (34.29%) of them had secondary education. Also, majority (61.43%) were
aware of the insurance scheme but did not subscribe to it. The major source of information was fellow
farmers. Rice farmers perceived agricultural insurance as essential risk
management tools, but awareness of the scheme was poor, generation about the
scheme is poor. However, farmers risk perception shows that the price of
fertilizer (2.84%), output price (2.09%), access to credit (2.87%), pest and
diseases (2.59%) and unpredictable weather (3.00%) were ranked high. The major
strategies adopted by farmers are formal
and informal insurance mechanism which were borrowing from members(28.03%),
savings and sales (27.57%) while crop diversification (40.08%), inter-cropping
(26.29%) and farm fragmentation(20.68%) where the strategies adopted by rice
farmers to minimize risk shock in their crop production. Age and education
qualification had positive signs and were statistically
significant(p<0.05)while farm size,
annual income, access to extension education and premium rate showed negative
signs but were statistically significant
(p<0.01 and 0.05) effect on the farmers willingness to purchase for
agricultural insurance The result of
factor analysis showed that
remoteness of rice farmers from the service provider (0.911), lack of
good access road network (0.610),high cost of
transportation(0.480),institutional policies include limited knowledge
of insurance scheme(0.783), corruption and fraudulent attitude of insurance
providers(0.742),and financial constraints include low income level(0.557),high
rate of premium(0.638) and poor returns from the sales of rice output(0.580)
were the major constraints to rice farmers participation in agricultural
insurance in the study area.
CHAPTERONE
INTRODUCTION
BACKGROUND
OF THE STUDY
Nigerian farmers are
increasingly faced with risk and uncertainty factors such as droughts, floods,
diseases, pests, accidents, fire, theft, damage and several other unplanned
events whose occurrence cannot be readily predicted and therefore, poses
serious danger to the progress of farming enterprise in Nigeria (Eleri et al,
2012). Risk affects production choices – with implications for the overall
economic efficiency of agricultural production (Cafiero et al, 2007).Risk is
believed to play an important role in the investment decisions of individual
farmers (Isik and Khanna, 2003). Risk in production is a strong characteristic
of agricultural production (Knight et al., 2003). Although definitions of risks in agriculture
arise due to uncertainty over factors determining returns to agricultural
production (OECD, 2008). Uncertainty in agriculture reflects the nature of most
farm production systems, which is influenced by ever-changing economic and
biophysical conditions. The natural lag between when production decisions are
made and when returns to farming can be realised exposes agricultural
enterprises to the variability, in the intervening period, of a range of
factors that determine the value of production. Variability in these factors
results in uncertainty over key determinants of farm income like output price,
yield, and input costs – with implications for farmers’ economic welfare and
effects on the economic (allocate) and technical efficiency of farm production
(Mathews, 2010).
Agricultural risks
are prevalent throughout the world and they are particularly burdensome to
small scale farmers in developing countries. The realisation of the risk leads
to fall in farm incomes; they can adversely affect the economic welfare of
those working in agriculture, with the potential to constrain future investment
and growth of farm businesses Bielza and Diaz-Caneja (2009). Agricultural
enterprises still constitute the most risky business in Nigeria (Nmadu &
Peter, 2010). This is because the production environment is fraught with
imperfect knowledge and the vagaries of nature. The complex nature of weather
and climate as well as other factors make agricultural enterprises more
difficult to manage.
Generally, there is a growing consensus in
the scientific literature that in the coming decades the world will witness
higher temperatures and changing precipitation levels. The effects of this will
lead to low/poor agricultural products. Evidence has shown that climate change
has already affecting crop yields in many countries (IPCC, 2007; Deressa et al,
2008; BNRCC, 2008). This is particularly true in low-income countries, where
climate is the primary determinant of agricultural productivity and adaptive
capacities are low (SPORE, 2008). Many African countries, which have their
economies largely based on weather sensitive agricultural productions systems
like Nigeria, are particularly vulnerable to climate change (Dinar et al,
2012). This vulnerability has been demonstrated by the devastating effects of
recent flooding in Nigeria and the various prolonged droughts that are
currently witnessed in some parts of Northern region. Patrick (2010), stated
that since farmers cannot assume the probability of occurrence of any of these
and cannot bear these risks and uncertainties alone, they are faced with the
option of transferring or sharing the risks involved in the day-to-day
management of their farms with one or more individuals.
Therefore, the issue
of agricultural risk cannot be effectively handled without effective crop
insurance programs (Ajakaiye, 2001). Agricultural insurance programs could be
seen as an effective mechanism for reducing the losses farmers suffer due to
natural calamities such asn floods, droughts, and outbreaks of pests and
diseases. It enables farmers to obtain credit and financing for investment in
new technologies, tools, and equipment to enhance and sustain their productive
capacity. Ray(2001) concluded that no
sustained and steady development of the developing countries is possible
without some forms of crop-agricultural insurance to underwrite risks of
crop-agricultural failure. He further explained that agricultural insurance is
one of the notable methods by which farmers can share or transfer the risks and
uncertainties associated with their farming enterprise as it encourages them to
make greater investment in Agricultural production, promotes their confidence
in venturing into adoption of new and improved farming practices, which ensures
continuity of their farming enterprise,.
Agricultural
insurance is mainly constituted of
three basic types of agricultural coverage, which include: macro-level coverage, multiperil coverage and
micro insurance. The macro-level coverage is employing a relatively new
instrument called parametric or weather index. The multiperile coverage
provides protection against crop losses to specific farms and micro insurance
coverage provides protection for the individual farmers (David, 2008).
The first factor to
be considered when deciding on an insurance policy is the need for risk
protection(Isik & Khanna, 2003).
Every individual has a different attitude towards exposure to unknown
events or risks. This basic attitude
towards risk is known as a risk preference.
Many things, including the financial position of the farmer and exposure
to other risks, may influence a person’s risk preference. A more strongly risk averse farmers would
tend to be more comfortable with a higher level of crop insurance protection,
while a less risk averse farmer would be inclined to purchase a lower level of
protection (Knight et al, 2005). Moreover, the existence of such risks has been
found to alter households’ behaviour in line with their level of risk aversion.
In the empirical literature, many researchers have found that risks cause risk
averse farmers to be less willing to undertake activities and investments that
have higher expected outcomes, but carry with them risks of failure (Adebusuyi,
2004). For example, it is not uncommon to observe farm households in developing
countries being reluctant to adopt new technologies even when those
technologies provide higher returns to land and labour than traditional
technologies. The extent of this reluctance being a reaction to their risk
preferences
In general, insurance
purchase is a form of risk management used to hedge against a contingent loss
(Iturrioz, 2009). The conventional definition is the equitable transfer of a
risk of loss from one entity to another in exchange for a premium or a
guaranteed and quantifiable small loss to prevent a large and possibly
devastating loss. Agricultural insurance is a special line of property
insurance applied to agricultural firms. In recognition of the specialized
nature of this type of insurance, insurance companies operating in the market
either have dedicated agribusiness units or outsource the underwriting to
agencies that specialize in it. Basically, agricultural insurance is designed
to provide covers for financial losses incurred due to reduction in expected
outputs from agricultural products. Agricultural investments unfortunately are
among the most risky economic ventures one can embark upon. The absolute
dependence on unpredictable weather conditions like hailstorm, flood, drought
and other natural hazards, make income from rice production to be very
unstable. Other agricultural products like livestock, poultry and dairies are
exposed to the risks of which occur in catastrophic proportions. The recent cases
of flooding, bird flu and pig swine in Nigeria comes readily to mind. Agricultural insurance purchases protect the
farmer against these unforeseen circumstances by way of indemnification. It
also serves as securities for banks as indemnification for financial losses
suffered farmers from damages to their products and will provide funds for
servicing such loans.
Insurance purchase
has major limitations in that, it is a low priority for many poor farmers in
the face of competing demands for scarce cash surpluses from agriculture. Most
poor farmers would rather manage their production risk through diversified
farming systems, low input utilization strategies and off-farm income. Farmers’
priorities are first to ensure that they have timely access to inputs of seeds,
fertilizers, and often, credit with which to buy these inputs. Only then can
they consider purchasing insurance.
Success of agricultural insurance is dependent on other basic
agricultural services such as extension services, timely availability of
inputs, agricultural credit and efficient marketing channels for agricultural
outputs. Where these related services
are absent, the benefit from agricultural insurance is likely to be minimal and
this tends to be the case in developing economies (Albert, 2000). Nigeria’s
agricultural sector falls into this category. Sadati et al (2010), suggests
that in developing countries, the markets for formal insurance and reinsurance
are either under-developed or non-existent. Majority of the farmers use their
informal mechanisms to cope, manage and prevent their crop. Also, there is lack of effective legal
systems to enforce insurance contracts. These factors contribute to an
inefficient agricultural insurance purchase performance.
To deal with risks,
farm households use several kinds of informal arrangements. The most common
coping mechanisms used by the majority of farmers are diversification of their
crops, sharing risk within social networks and/or relying on wealth that
results from the past flow of precautionary savings. These mechanisms, although
they help farmers in mitigating their exposure to risks, are incomplete. The
literature reveals that traditional risk management measures are costly. They
lead to a considerable reduction of farmers’ incomes, particularly poorer
farmers (Rutten and Youssef, 2007). There is therefore a necessity to make
modern risk management instruments like formal insurance available to farmers.
The major risk
associated with rice production today according to (Ajatomobi, 2004) include
drought, flooding, pest and diseases, all of which are expected to worsen with
climate change. Drastic changes in rainfall patterns and drought will introduce
unfavourable growing conditions into the cropping calendars thereby modifying
growing seasons which could subsequently reduce productivity. From the
foregoing, there is clear evidence in parts of the rice growing regions of
Nigeria that rice production is already suffering considerable setback due to
risk involved.
The complex nature of
Weather and climate change according to Kuta (2011) is one of the most critical
challenges ever to face humanity. It can cause the worst forms of economic and
security problems for humanity. It determines the health of the resources on
which the economy depends and this phenomenon is one of the challenges
confronting West Africa among other sub-regions of the world. Since rice production in Nigeria is mostly
rain-fed, it follows therefore that any change in climate is bound to impact
its productivity in particular and other socio-economic activities generally,
in the country. The issue of climate change has become more threatening not
only to the sustainable development of socio- economic and agricultural
activities of any nation but also to the totality of human existence (Adejuwon,
2004, SPORE, 2008; Apata et al, 2009). Local farmers according to Kuta (2011)
are seriously concerned about weather variations because of the impact on food
security, availability, stability, accessibility and utilization. The change in
weather affects livestock, forestry, fishery and the decreases aquatic plant
species including rice. Production of rice, which is the world’s most important
crop for ensuring food security and addressing poverty, will be thwarted as
temperatures increase in rice-growing areas with continued climate change
(Gumm, 2010). Ramirez (2010) notes that unforeseen changes associated with
global warming in temperature, carbon dioxide and rainfall are expected to
impact rice production. Studies have shown that increase in temperature, due to
climate change, adversely affect rice crop physiology ultimately decreasing
crop yield and grain quality. Gumm (2010) re-affirms that rising temperature
during the past 25 years have already cut rice yield growth rate by 10-20
percent in several locations. He further adds that unless there is a change in
the rice production methods or new rice strains that can withstand higher
temperatures, are developed, there will be a loss in rice production over the
next few decades as days get hotter.
Since the dangers of
agricultural loss can be very devastating and crumbling, farmers have embarked
on mechanisms (formal and informal insurance purchase) to prevent, manage or
cope with this fearful phenomenon. In a study carried out by David(2008)
explained that formal insurance is constructed to handle large covariate risks
while Informal insurance purchase is apt at handing smaller idiosyncratic risks
among farmers. Thus, formal insurance
can be a complementary financial tool to informal insurance. According to Exelle
& Verschoor (2013) in their study, they found out that formal insurance may
encourage additional risk taking, creating residual idiosyncratic risks that
the farmers may incur, when a formal insurance is sold to farmers. Træ rup (2012) argues for the importance of
maintaining both sources of insurance, and warns of the danger in farmers’
erroneously “over-purchasing” formal insurance to cover risks that only
informal networks can handle. Ambrus et
al(2014) in their study said that informal insurance is more of a reality at
the group level, where different sub-groups farmers insure one another. Very
recently Mobarak& Rosenzweig (2014) show, in a large randomized control
trial in India, that formal insurance is a complement to the coverage provided
by informal networks, and that formal insurance
even enables farmers to take larger risks that they otherwise would not
have been able to.
Therefore insurance
purchase is the primary risk management toolfarmers use to financially recover
from natural disasters and volatile market fluctuations; pay their bankers,
fertilizer suppliers, equipment providers and landlords; purchase their
production inputs for the next season; and give them the confidence to make
longer term investments that will increase their production efficiency
(Devereux, 2004). Without effective and affordable crop insurance, catastrophic
production losses would sap therural economy by setting in motion a series of
harmful events: farm failures and consolidation, job losses, farm-related small
business failures, financial stress on rural banks and reduced investment in
Nigeria agriculture. A financially healthy rural economy requires a financially
healthy farm production sector (Anderson, 2001, World Bank, 2001, Townsend,
2005). It cushions the shock of crop losses by providing farmers with a minimum
amount of protection. It spreads the crop losses over space and time and helps
farmers make more investments in agriculture. It forms an important component
of safety-net programmes as is being experienced in many developed countries
like USA and Canada as well as in the European Union. However, one need to keep
in mind that formal insurance purchase should be part of overall risk
management strategies.