Assessing willingness-to-pay and demand determinants for index-based agricultural insurance

Abstract

Agricultural production in Uganda is predominantly rain-fed and highly vulnerable to climate variability, exposing smallholder farmers to substantial weather-related risks. Index-based agricultural insurance has emerged as a promising risk-transfer mechanism, yet uptake remains persistently low despite government-supported initiatives such as the Uganda Agricultural Insurance Scheme. This study investigated the willingness-to-pay (WTP) and demand determinants for index-based agricultural insurance among smallholder farmers in Luweero and Mukono districts, Uganda. The specific objectives were to examine the socioeconomic characteristics of smallholder farmers, assess their risk perceptions and attitudes toward basis risk, estimate their mean and maximum WTP, and determine the socioeconomic, behavioural, and perceptual factors influencing demand. A cross-sectional quantitative research design was adopted, and the Contingent Valuation Method was employed to elicit WTP from 200 smallholder farmers selected through a multistage sampling procedure. Primary data were collected using a structured interviewer-administered questionnaire covering socioeconomic characteristics, agricultural risk exposure, insurance knowledge, behavioural characteristics (risk aversion and ambiguity aversion), basis risk perception, and WTP. Data were analysed using descriptive statistics, binary logistic regression, and Tobit regression models. The findings revealed that WTP was moderate but highly price-sensitive, with 55% of farmers willing to pay at 10,000 UGX per acre, declining to 35% at 20,000 UGX per acre. The mean maximum WTP was 15,247 UGX per acre. Binary logistic regression results showed that insurance knowledge (OR = 2.440, p = 0.030), education (OR = 1.719, p = 0.013), risk aversion (OR = 1.613, p = 0.011), and household income (OR = 1.470, p = 0.020) were positively associated with WTP, while ambiguity aversion (OR = 0.599, p = 0.012), basis risk perception (OR = 0.654, p = 0.017), and farming experience (OR = 0.972, p = 0.062) were negatively associated with WTP. Farm size (OR = 1.215, p = 0.056) was positively associated with WTP at the 10% significance level. All five null hypotheses were rejected, confirming that education, basis risk perception, risk aversion, household income, and farming experience significantly influence WTP. The study concludes that there is latent demand for index-based agricultural insurance, but this demand is constrained by affordability, limited understanding, ambiguity aversion, and basis risk concerns. The study recommends premium subsidies, awareness campaigns, improved index design, and transparent communication to enhance uptake. These findings provide empirical evidence to inform policymakers, insurers, and development partners on designing viable and responsive index-based agricultural insurance products for smallholder farmers in Uganda. Keywords: Willingness-to-pay, index-based agricultural insurance, basis risk, risk aversion, ambiguity aversion, smallholder farmers, Uganda