Determining premiums for small-holder farmers in Kenya for weather index insurance

Abstract

This research aimed to demonstrate that weather index insurance could be used by what farmers in Narok to protect themselves against adverse effects of drought. This involved determining the minimum amount of premiums that would be required from small scale wheat farmers. In this case a cash or nothing put option which has similarities with a weather index was considered. The methodology involved using rainfall data from Narok County over a period of 20 years. Data from 1993-2013 was provided by the Kenya Meteorological Department of Kenya. Narok was chosen as the study area since it is the highest net producing county of wheat in Kenya and it has previously been affected be droughts. The average amount of rainfall during the planting season was used as the trigger amount. A rate of 5% was assumed to determine the premiums. From the study's conclusion, it was established that the cash or nothing put option could be used to hedge for drought and it gave an affordable amount of premiums to be paid for 100 currency units.