Risk Attitude and Insurance: A Causal Analysis

Abstract

Decisions regarding insurance depend crucially on the extent to which individuals are willing to bear risk. Farmer’s decision of whether or not to participate in insurance is likely to be influenced by comparison of expected net gain (or loss) with or without insurance. The attitudes of farmers to risk were assessed using Likert scale. The results show that farmers were aware of the benefits of agricultural insurance and were positively disposed to it. However, majority were against using insurance as a prerequisite for extension of credit lines. This study uses Safety First principle to investigate the impact of insurance on risk attitude of farmers.The result show the overall mean to be 2.47 implying that the farmers were intermediate risk takers. The risk attitude coefficient showed that 20.6 percent were low risk-averse, 40.2 percent intermediate risk-takers and 39.2 percent showed high risk-aversion. The influence of socio-economic factors revealed that age, education, experience and stock size were significant and positive determinants of risk attitude. Access to agricultural insurance impacted positively on the attitude of farmers to production risk. The Chow test confirmed differences in risk attitude between farmers with insurance and farmers without insurance.