Weather index drought insurance: an ex ante evaluation for millet growers in Niger

In the Sudano-Sahelian region, which includes South Niger, the inter-annual variability of the rainy season is high and irrigation is scarce. As a consequence, bad rainy seasons have a massive impact on crop yield and regularly entail food crises. Traditional insurances based on crop damage assessment are not available because of asymmetric information and high transaction costs compared to the value of production. We assess the risk mitigation capacity of an alternative form of insurance which has been implemented in India since 2003: insurance based on a weather index. We compare the capacity of various weather indices to increase utility of a representative risk-averse farmer. We show the importance of using plot-level yield data rather than village averages, which bias results. We also illustrate the need for out-of-sample estimations in order to avoid overfitting. Even with the appropriate index and assuming a substantial risk aversion, we find a limited gain of implementing insurance, roughly corresponding to, or slightly exceeding, the cost of implementing such insurances observed in India. However, when we treat separately the plots with and without fertilizers, we show that the benefit of insurance is higher in the former case. This suggests that insurances may increase the use of risk-increasing inputs like fertilizers and improved cultivars, hence average yields, which are very low in the region.