Potential of rainfall indexed micro-insurance programs as tools to mitigate agricultural production risks in Tanzania

Abstract

This paper discusses the theoretical and practical approach of developing and pricing rainfall indices, the potential and challenges of using rainfall indexed microinsurance programs as tools to mitigate agricultural production risks in Tanzania. The paper draws on the conceptual and methodological approaches of an on‐going research project which is funded by the Research on Poverty Alleviation (REPOA). The overall aim of the project is to estimate rainfall indexed put options and provide quantitative evidence that put options can be effectively employed as a viable agricultural risk management strategy by small scale farmers in Tanzania. The project is intended to provide the real world contexts within which pricing rainfall indexed put options methodology and tools can be assessed. Specifically, the project reviews the existing policies that affect availability and access to microfinance by small‐scale farmers in Tanzania. It intends to develop and price rainfall‐indexed put options at the ward level; estimate the willingness to pay for rainfall‐indexed put options; identify factors influencing willingness to pay for these options; build capacity to develop and price rainfall‐indexed put options and estimate willingness to pay for rainfall‐indexed put options.