Understanding German farmers' intention to adopt drought insurance

Abstract

Climate risks, particularly droughts and heat waves, negatively affect agricultural incomes worldwide. Drought insurance is promising to mitigate resulting income losses at the farm level. As the proportion of German farmers insured against drought is low, policymakers and insurers aim to increase the appeal of drought insurance to farmers. However, to accelerate their efforts in this regard, more information regarding farmers' intention to adopt drought insurance beyond current adoption is needed. To obtain initial insights, we surveyed 127 German farmers in a risk management context and applied a modified transtheoretical model of behavioral change. This revealed detailed information on the gradual adoption of drought insurance. Given a heterogenous distribution among the gradual stages of adoption, a binomial logit model was estimated instead of an ordered logit to investigate farmers' current intention to adopt drought insurance. Furthermore, the machine learning technique of least absolute shrinkage and selection operator (LASSO) was applied to select the most relevant features to be used as explanatory variables in the estimation. The results show that farmers' gender and risk attitude, land tenure, how severely they were affected previously by weather risks, and the level of trust in index insurance products have a statistically significant effect on farmers' intention to adopt drought insurance. Additionally, this study provides insights into farmers' reasons against drought insurance. As such, the results are important to policymakers considering policy intervention, insurers interested in farmers' intention to insure and to researchers focusing on farmers' adaptation to climate change.

Keywords: Agriculture; Climate change; Drought insurance; Risk management; Transtheoretical model.