Analysis of Microinsurance Demands Combined with Microcredit on Rice Farming by Using Utility Function

Abstract

Agriculture is a business that is prone to risk and uncertainty so farmers can face serious difficulties at any time. Especially for farmers in developing countries who are generally small farmers. To anticipate these risks and uncertainties, farmers can take agricultural insurance or apply for credit. Even though an agricultural insurance program is available, farmers are constrained by the limited amount of collateral and liquidity constraints. This study aims to analyze the demand for microinsurance combined with microcredit in rice farming. The analysis is carried out with utility functions and utility comparisons using ordinal comparison. Meanwhile, to determine optimal demand by maximizing the utility using an ordinal approach through analysis of budget line and indifference curve. The results show that the demand for insurance and the profitability of agricultural credit increases along with the lower demand for collateral when applying for agricultural loans. In addition, microinsurance combined with microcredit is more profitable for farmers when collateral is not requested when applying for agricultural credit. Based on the results of the case study, the optimal demand is obtained when the premium for Rice Farming Business Insurance (AUTP) is and the installments of BNI People’s Business Credit (BNI KUR) is