Risk Aversion Levels, Risk Optimality And Willingness To Pay For Weather Index Insurance Policy Among Food Crop Farmers In Upper West Region, Ghana

Abstract

Climate variability and production risks continue to threaten the livelihoods of food crop farmers in northern Ghana, particularly in the Upper West Region. In response, this study investigates farmers’ preferences and their willingness to pay for weather index insurance (WII), analyzes their level of risk aversion, determines risk-optimal farm plans, and examines the factors influencing both subscription and subscription intensity to WII policies. Secondary data on rainfall, maximum and minimum temperature (1976–2023) were obtained from the Ghana Meteorological Agency (GMet), while primary data were collected from randomly sampled food crop farmers in the Upper West Region. A range of analytical methods were employed, including the Target-MOTAD model, Multiple Price List method, Modified Mann-Kendall and Sen’s slope tests, Kendall’s coefficient of concordance, the Mixed Logit model, and the Negative Binomial Hurdle Model (NBHM). The study addresses a methodological gap by applying NBHM and Zero-Inflated Negative Binomial models as advancements over the Poisson regression model, and the Mixed Logit model as an enhancement over the Multinomial Logit. Model fit and performance were assessed using AIC, BIC, Log-likelihood, rootograms, and the Vuong test. The findings reveal an increasing trend in rainfall, maximum, and minimum temperatures in the region, though the increase in rainfall is statistically insignificant. Farmers were found to be highly risk averse and significantly preferred WII policy attributes such as prompt claim payouts, rainfall data from GMet, low premiums, subsidies on agricultural inputs, and deferred payments. Interlinking credit with insurance was the least preferred option. Farmers expressed willingness to pay GH¢5.38 for rainfall data, GH¢6.67 for subsidies, and GH¢13.91 for deferred premium payments. Risk-optimal farm plans, involving 1.5 hectares of soybean and 0.33–0.42 hectares of sorghum, generated higher incomes (GHS 9403.42 and GHS 9835.10) compared to farmers’ current plans (GHS 7412.97). Approximately two-thirds (64%) of food crop farmers had subscribed to WII, yet only 39% of cultivated land was covered. The NBHM demonstrated superior empirical performance in modeling count data with excess zeros and dispersion issues, while the Mixed Logit model more effectively captured both observed and unobserved heterogeneity in preference data. Key factors significantly influencing subscription and intensity include age, sex, farm size, experience, education, prompt insurance payment, extension services, credit access, and risk-efficient income. In conclusion, farmers in the Upper West Region face high climate risk and exhibit strong risk aversion, which influences their preference for specific WII features and farm planning strategies. Adoption of risk-efficient production plans can enhance income and affordability of insurance premiums, thereby increasing WII participation. It is recommended that the Ministry of Food and Agriculture (MOFA) and the Ghana Agricultural Insurance Pool (GAIP) promote risk-efficient farm planning through extension services, integrate insurance into national agricultural policy, tailor WII products to farmers’ needs, and intensify farmer education to build trust and understanding around WII schemes