Stoeffler Rates Insurance Among West African Farmers

By Rebecca Egli – Facing high levels of risk, farmers in developing countries need good insurance. At a lecture hosted on May 26, 2016 by the Africa-California Research Innovations Cluster, Quentin Stoeffler, a postdoctoral fellow in the Department of Agricultural and Resource Economics at UC Davis, presented his research on the quality of index insurance available to cotton farmers in Burkina Faso.

Droughts, floods, earthquakes, infestations, illnesses, price fluctuations—all can threaten livelihoods built on agriculture, regardless of location. For farmers in a country like Burkina Faso, such “shocks” often bring long term consequences in the form of poor health, malnutrition, the depletion of assets such as land and livestock, and alternative, high risk forms of employment.

Dr. Stoeffler’s work focuses on index insurance, a low-cost insurance option that attempts to reduce risk for farmers. According to the International Finance Corporation, index insurance offers an innovative approach to insurance coverage—one that pays out benefits to farmers based on a predetermined index to cover the loss of assets. If the index indicates a shock in an area (such as low rainfall and high temperature), insured farmers receive payments to cover their crop losses. This process eliminates the need for a claims adjustor to assess damage to individual farms and allows for multiple claims in an affected region to be settled more quickly.

Lottery ticket

To uncover the effectiveness of index insurance for vulnerable cotton farmers in Burkina Faso, a small west African nation in the Sahel, Stoeffler set out to measure the quality of index insurance and discover whether or not existing policies provided adequate coverage. Even in regions prone to drought and flooding, Stoeffler found that the demand for index insurance was surprisingly low.

While lack of financial education, credit constraints, and limited access to insurance providers offer partial explanations, he noted that low demand may also be tied to the quality of protection provided. Since some risks are not covered by index insurance policies, farmers could experience a shock, pay an insurance premium, and still not obtain a payout. Many farmers view insurance as a “lottery ticket” at best.

In Burkina Faso, cotton production currently serves as the nation’s chief export and an important cash crop for farmers. Yet cotton also requires large capital investments for labor, fertilizer, seeds, and pesticides. Nearly 95 percent of the crop is sold to the nation’s largest cotton company, Sofitex. In 2012, the company paid farmers 245 francs (around 42 cents) for every kilogram of fiber produced. According to Stoeffler, Sofitex maintains a local monopoly on the cotton sector economy. It provides inputs such as cotton seeds, fertilizers, pesticides, and technical assistance on credit, with the guarantee that the company has the exclusive right to purchase the crop at a fixed price.

Low quality, high price

Did purchasing an index insurance policy cause farmers to feel more protected and encourage them to invest more capital in their farms? According to Stoeffler’s research on hundreds of family farms, the answer is no. Stoeffler found that purchasing insurance failed to lead to an expansion of the surface area cultivated or an increase in yields. He concluded that the quality of insurance currently available to farmers is too low, while the cost remains too high. Many farmers who had a contract with Sofitex struggled to increase production in order to cover the cost of the insurance. 

This is a promising product, Stoeffler believes, but one that comes with many risks.

Learn more about Quentin Stoeffler and his work at his researcher profile page.

Filed under: