Weather Index-Based Insurance in a Cash Crop Regulated Sector: Ex Ante Evaluation for Cotton Producers in Cameroon

This study assesses the risk mitigation capacity of weather index-based insurance for cotton growers in Northern Cameroon. It compares the capacity of various weather indices coming from different sources such as daily rainfall, temperatures, and satellite imagery to increase the expected utility of a representative risk-averse farmer. Weather index-based insurance does not suffer from some of the shortcomings of traditional agricultural insurance. It provides an objective and relatively inexpensive proxy of crop damages. However, its weakness is basis risk that is the imperfect correlation between weather index and the yields of farmers contracting insurance. Study results are significant in the light of recent findings and show very low take-up rates of weather index insurances. Findings include:

• Weather index-based insurance is associated with huge basis risk no matter what the index or the expected utility and thus has limited potential for income smoothing;
• Using observed cotton sowing dates significantly increases the performance of indices based on daily rainfall data;
• Calibrating parameters in sub-regions allows to dramatically reduce basis risk and to avoid non-negligible balancing out between distinct geographical zones.