Risk Aversion Level Influence on Farmer’s Decision to Participate in Crop Insurance: A Review

Abstract

Agricultural insurance in Indonesia is focused specifically on rice farming and is locally known as Asuransi Usahatani Padi (AUTP). To encourage farmer participation, the government subsidises farmers’ cost of insurance (premium) by 80%. Despite high subsidy, AUTP is still unable to reach the coverage target. The objectives of this study are to investigate farmers’ Risk Aversion Level (RAL), its influence on farmers’ decision to participate in AUTP, and the effect of farmers’ participation in AUTP on their income. The result of this study can contribute to enriching agriculture insurance literature from the point of view of developing countries and catalyse other studies on this matter especially in Indonesia. The analysis methods used in this study were multiple pricelist designs and propensity score matching with a logistic regression model. 130 farmers were interviewed. The results showed that farmers tend to have a high level of risk aversion (82.3% of farmers insure almost all of their land). RAL has a significant effect on farmers’ decision to purchase AUTP (< 0.01). A positive value of Average Treatment on the Treated (ATT) indicated that participation in AUTP has a positive impact on farmers’ income. AUTP is able to absorb production risks and encourage use of high input in farming.