We designed the insurance grant in collaboration with the Ghanaian Ministry of Food and Agriculture (MoFA) Savannah Agricultural Research Institute (SARI) and PAS and secured permission from the Ghana National Insurance Commission to research the effects of a non-commercial rainfall index insurance product.

Qualitative discussion with farmers (focus groups) and partners (historical rainfall data, although limited, from the Ghana Meteorological Service GMet) led to the determination of the trigger rainfall amounts for catastrophically low yields. The value of per acre insurance payouts in case of catastrophically low yields was set to be equal to mean yields in the GLSS5+. In order to enhance farmer understanding of our product, we reduced product complexity. We acknowledge that the simplicity came at the expense of increased basis risk. (See Hill and Robles (2011) for an analysis and innovative approach using laboratory experiments to assess farmer perception of basis risk and insurance fit).

The trigger for payouts was determined based on the number of dry or wet days in a month (where either too much or too little rainfall triggered a payout). The maximum payout was chosen to cover 100% of a full loss, or $145 per acre of maize grown. The Ghana Meteorological Association (GMet) provided rainfall data at all steps of the process: to inform development the insurance products and to provide close to real-time access to rainfall data.

Around March 2009, we sent insurance marketers to visit individually with those farmers selected to receive the insurance grant. Each farmer was offered a grant of insurance coverage for the number of acres they reported farming maize in the GLSS5+ baseline. The marketers described the insurance policy, left a copy of the policy document with each farmer and informed the farmer he would return approximately two weeks after this visit to issue a certificate to those farmers agreeing to take up the product. In this case, where the product was offered at no cost, 100 percent of farmers took it up.

A total of 230 policies were issued to farmers free of cost, covering a total of 1159.5 acres, for an average of about five acres per farmer. Unbiased GMet employees, who recorded daily rainfall measurements on paper that were converted into electronic datasets by the main GMet office, managed all rain gauges. Electronic rainfall data arrived in 10 day chunks, typically 10-20 days after they had been recorded. IPA had systems in place to receive the incoming rainfall data and check automatically for trigger events. In the case that a trigger event occurred, payouts were made no more than three to four week days after the data were available. One payout was made to 171 farmers in July of 2009 at $85 per acre. The average payout was $350 per farmer, conditional on receiving a payout.

Year Two: Insurance Product Pricing Experiment

For year two, we expanded the sample frame in order to conduct an insurance pricing experiment. The second year insurance covered was redesigned and renamed Takayua, which means “umbrella” in the local Dagbani language. The insurance pricing was calibrated to trigger per-acre payouts after:

seven or more consecutive wet days (over 1mm of rainfall) or

twelve or more consecutive dry days (1mm or less rainfall).

Payouts under Takayua were promised to be delivered two weeks after the dry or wet spell had broken. We used data from the prior 33 years to determine pricing, although 10 of those 33 years did not have complete rainfall data for all rainfall gauges. The pricing experiment included the grant experiment sample from year one, as well as two new samples: samples frame 2 and sample frame 3.

We randomly assigned each community in Sample 1 and 2 (these 2 samples are drawn from the same communities) to be sold the insurance product at a price of either of the highly subsidized prices GHC 1 or GHC 4 ($1.30 or $5.25) and then randomly drew 867 of the 1178 in Sample Frame 1 and 2 to be sold the insurance. The remaining 311 are in a control group of households not offered insurance. Both prices were highly subsidized, as the actuarially fair price was about 7.65 GHC ($9.58) per acre. Offers were made in November 2009, and we sold 402 out of 475 offered at 1GHC and 261 out of 392 offered at 4GHC.

We randomly assigned each community to receive insurance marketing at near the actuarially fair price (GHC 8 or GHC 9.5, equivalent to $10.50 or $12.50, depending on the rain gauge to which the community was assigned) or the estimated competitive market price (GHC 12 or GHC 14, equivalent to $15.85 or $18.50, depending on the rain gauge).

Offering the insurance product at several prices, including at the estimated actuarially fair and competitive market prices, allowed us to measure demand for the product at different prices and to further refine a demand curve for rainfall index insurance in the region.

Offers were made in March 2010.

Each farmer was visited up to four times as part of the marketing:

• During the first time, a marketer educated individual respondents about the Takayua product and its price.
• If the farmer was interested in purchasing, during the second visit a marketer returned to sign contracts and collect premiums.
• During the third visit, a marketer issued a physical policyholder certificate, including details on the policyholder and acreage covered.
• During the fourth visit, an auditor from IPA verified understanding of the terms and conditions of Takayua with about 10 percent of farmers who took up the project.

Year Two: Insurance Payouts

Two of five rainfall stations triggered payouts totaling just over $100 000 in 2010.

Year Three: Commercial Product and Pricing Experiment

We negotiated a partnership with the Ghana Agricultural Insurance Programme (GAIP) to market a commercial drought-indexed insurance product named Sanzali. The Sanzali was offered at an actuarially fair price of $7.90 per acre, as well as a subsidized price of $4.00 per acre and a market price of $11.90 per acre. This product was reinsured by Swiss Re and endorsed officially by the National Insurance Commission. Due to the increased complexity of the commercial product (compared to the original non-commercial product from years one and two), individual marketing scripts and protocols emphasized transparency about the product, named Sanzali, the Dagbani word for “drought.” Sanzali was divided into three stages based on the maize plant’s growth stage, and each stage included one or two types of drought triggers (cumulative rainfall levels over 10-day periods, or consecutive dry days). The Sanzali product was offered at an actuarially fair price of $7.90 per acre, as well as a subsidized price of $4.00 per acre and a market price of $11.90 per acre. The pricing assignments were randomized by community, with 23 communities (31.9 percent) in the market price cell, 23 communities (31.9 percent) in the actuarially fair and 26 communities (36.2 percent) in the subsdized price cell. Control farmers were randomized individually.

The same farmers from the year two pricing experiment were included in this year three pricing experiment. We offered insurance to 1,095 farmers and sold a total of 655 policies (59.8%). As with year two, each farmer was visited up to four times. Demand was 63.9% at the subsidized $4.00 per acre price, 55.6% at the actuarially fair GHC $7.90 per acre price and 40.0% at the market price GHC $11.90 per acre.

As with the second year, three to seven days after the marketing visit, IPA staff conducted audit visits with ten percent of the insurance group to test their comprehension of the product. Audit reports confirm that farmers had a clear understanding of the product, including complex ideas such as cumulative rainfall per dekad. IPA also conducted informal interviews to gain insight into how smallholders financed their insurance purchase, finding that smallholders made their purchases through informal loans, produce sales, gifts or small ruminant sales.