The perception of climate change and the demand for weather-index microinsurance: evidence from a contingent valuation survey in Nepal

ABSTRACT

Despite donor assistance and government subsidies, the uptake of microinsurance products to insure against extreme climate events remains low in many climate vulnerable economies. Emerging evidence indicates that various non-price factors such as lack of knowledge, trust in institutions, beliefs, and perceptions about climate change partly explain the low uptake. This study uses the CVM approach to investigate the effect of one such factor – farmers’ climate change perceptions – on the adoption of weather index micro-insurance. We introduce two hypothetical weather index microinsurance products to farming households in Nepal: the first one (basic) insures paddy only, whereas the second one (comprehensive) also insures livestock. We use bivariate probit models with order effects for empirical estimation. We find that households’ ex ante perception of future climate change as well as their ex-post perceptions of past climate change impacts have significant effects on their microinsurance purchase decisions. Mean WTP-values for the basic and comprehensive products are NRs. 3096 and NRs. 13209 respectively. We also find some evidence of crowding-out effects on private risk transfer markets by other public and donor climate adaptation programmes. Our findings suggest that public policies should focus on increasing climate awareness, accountability and the development of competitive microinsurance markets.

KEYWORDS:

• Microinsurance
• climate change adaptation
• perception
• index insurance
• willingness to pay
• Nepal

Disclosure statement

On behalf of all authors, the corresponding author states that there is no conflict of interest.

Notes

1 For a summary of advantages on weather index microinsurance, see Barnett and Mahul (2007).

2 In 01/2015, 1 USD = 101 NPR (Nepalese Rupees).

3 Since the microinsurance is a brand-new product and is unfamiliar to farmers, social capital is not likely to affect their purchase decisions (their willingness to pay).

4 Social capital index is a constructed dummy variable. If any of the household members engage in any community groups, then the variable is assigned a value of 1. Otherwise, it is assigned a value of 0.

5 Although we are not as concerned about the endogeneity issue for Adapt, since it is not our main variable of interest.

6 The p-values of the endogeneity tests are 0.133 and 0.403, respectively.

7 Counterfactual analysis details are not presented because of space constraints.

Additional information

Notes on contributors

Veeshan Rayamajhee

Veeshan Rayamajhee is an assistant professor of economics at North Dakota State University.

Wenmei Guo

Wenmei Guo is an independent researcher in Illinois.

Alok K. Bohara

Alok K. Bohara is a professor of economics at the University of New Mexico.