Important new trends are modifying the external conditions faced by west African farmers. Climate change is already seen to alter rainfall patterns, while increasing yield volatility. Consequently, in rural West Africa, the covariate component of agricultural risks is getting stronger and threatens the village community as a whole. The safety net was applied to villages in northern Ghana, where informal mutual arrangements cushion idiosyncratic shocks. Results without external subsidy and with the official poverty-line indicate that an index-based safety-net would be capable of reducing by 20 percentage points the poverty incidence from an initial level of 63% and prove to be quite robust under Monte-Carlo resampling. Insurance markets are grossly underdeveloped in west Africa. Apart from the classical reasons for market failure related to asymmetric information and covariate-risk among participants, both particularly prominent in rural Ghana, the lack of effective legal systems to enforce formal contracts severely discourages such arrangements.
Molini, V., Keyzer, M., van den Boom, G. J. M., Zant, W., & Nsowah-Nuamah, N. N. N. (2010). Safety nets and index based insurance: Historical assessment and semi-paramentric estimation of an indemnity schedule for Northern Ghana. Economic Development and Cultural Change, 58(4), 671-712. https://doi.org/10.1086/652476