Agricultural Index Insurance Has Big Impacts for Farmers in Burkina Faso

In a randomized controlled trial in Burkina Faso, researchers found that farmers who purchased insurance made significantly more investments for higher future income despite implementation challenges, adding evidence for the high potential of agricultural microinsurance for development. The risk of catastrophic shocks, such as drought or flood, can keep agricultural households trapped in low-risk but low-return activities. In Burkina Faso, the poorest households are often stuck in farming basic food crops like millet and sorghum rather than high-return cash crops like cotton or sesame. Agricultural index insurance avoids the high costs of conventional insurance by basing payouts on an outside index of factors, such as an area's rainfall or vegetation growth, that can be used to accurately estimate average crop losses. This feature makes it possible to offer affordable agricultural insurance to small-scale farmers in developing economies. Insurance promotes development and resilience in two ways. Payouts for losses help farmers avoid selling assets, cutting meals or pulling children from school. However, the security of being protected in itself can empower farmers to invest more in crops that generate higher income. These increased investments and the resulting higher income create a pathway to greater prosperity. A pilot intervention among cotton farmers in Burkina Faso measured the impacts of index insurance on farmers' investments. The project began in 2014 in the Houndé region of Burkina Faso, one of the country's main cotton-producing regions. The researchers worked with the main local cotton company, a specialized microinsurance broker, and other project partners to develop and offer farmer groups an area-yield index insurance product that triggers payouts based on the amount of cotton purchased in an area. The intervention was randomized, with half of the farmer groups offered insurance on credit and the others serving as the control group. The researchers collected data from 1,000 households in 80 farmer groups in January 2014, before the intervention, and again in January 2015. They also conducted qualitative fieldwork in June 2016. The results showed that insured farmer groups received large payouts for significant losses in the 2014-15 season, which helped them avoid bankruptcy and social conflict. Despite implementation challenges, the intervention had substantial indirect effects on other investments. Sesame cultivation was 17.3 percentage points higher than for non-insured farmers, and insured households increased their livestock holdings on average by 1.6 cattle and 6.8 chickens. These results demonstrate how powerful index insurance can be as a tool for economic development, providing farmers the security to take on more productive risk, increasing their productivity and their long-term resilience. The researchers emphasize the importance of timing insurance sales and payouts to coincide with farmers' decisions about inputs and planting. Insurance sales that coincide with commitments for cotton input purchases will have the biggest impact on productivity investments. Payouts that coincide when input loans come due after harvests ensure farmers will not need to sell assets to pay back loans.