Time Journals of Agriculture and Veterinary Sciences Vol.1 (3): 31- 46 October, 2013 www.timejournals.org/tjavs © 2013 Time Journals Rainfall Indexed Microinsurance Program as a Viable Risk Management Strategy to Secure Agricultural Production in Tanzania Reuben MJ Kadigi, 1 Aloyce R. Kaliba, 2 Peter M. Kingu 3 1 Department of Agricultural Economics and Agribusiness, Sokoine University of Agriculture, Box 3007 Morogoro, Tanzania 2 College of Business, Department of Economics and Finance, Southern University and A&M College, P.O Box 9723, Baton Rouge, LA 70813-9723 3 Ministry of Livestock and Fisheries Development, P.O Box 9152, Dar es Salaam, Tanzania Corresponding author E-mail: rmjkadigi@yahoo.co.uk Accepted 30 September, 2013 This paper evaluates the potential of rainfall indexed microinsurance program to serve as a viable agricultural risk management strategy to secure agricultural production in Tanzania. We estimate the rainfall indexed put options in the different agro-ecological zones of Tanzania. The standardized precipitation index, levels and distribution of triggers for payouts and premiums are estimated for selected crops using parameters from the Pearson Type III distribution functions, equiprobability transformation techniques and extreme value theory. The estimated premiums for the selected (major) crops were relatively affordable though the ability to collate reliable rainfall data that represent actual rainfall falling on insured farms is deemed as an important aspect to consider before the establishment of the program. Keywords: Risk Management; Microinsurance; Rainfall-indexed; Standardized Precipitation Index; Payouts Introduction Rainfed agriculture continues to be the largest economic sector in developing countries accounting for an estimated 26% of all exports and earning more than 50% of the foreign currency (World Bank, 2008). However, production from this sector has been falling behind population growth rates and during low rainfall, most countries become net importers of grains such as maize and rice. Moreover, rainfall variability, both spatial and temporal, continues to have significant effects on output, income and poverty levels. In addition, the high risk associated with rain-fed agriculture influences farmers perceptions on investments in soil fertility and adoption of improved crop varieties and other yield-enhancing inputs (Gine and Yang, 2009). Coupled with other undesirable micro and macro variables, it makes it hard for small- scale farmers to effectively respond to opportunities that are made possible by emerging markets, trade and globalization. Even when precipitation is not a key limiting factor, rainfall tends to be random and is an important production factor in most agricultural production systems. This is manifested through high yield variability caused by excessive rainfall, droughts and recurrent dry spells. Several studies that have been conducted by the International Institute for Applied System Analysis on the impact of climate change on rainfed agriculture, conclude that the agricultural production area could decrease by 20%; affecting between 1 and 3 billion people. In Sub- Saharan Africa, it is estimated that 12% of the agricultural land will be lost due to climate change and rainfall variability will increasingly become a major constraint to yield improvement, competitiveness and commercialization of rainfed agriculture (Hill et al., 2011). Tanzania is not an exception in this case; the country possesses a complex landscape, formed by the western and eastern branches of the East African Rift, resulting in substantial spatial variability in climate within the nation. The country‟s climate varies from tropical at the coast to temperate in the highlands.Temperatures,for instance are predicted to rise by 2–4 degree centigrade come 2100, warming more during the dry season and in the interior regions of the country (Hulme et al., 2001; Paavola,