Climate change is the main challenge for farm households in the world and it becomes a special treat for underdeveloped country’s farmers whose income depends on whether condition. And Ethiopia is one of the few countries in the world that has been ravaged by extreme drought. While its economy depends on agriculture, Farmers face a variety of climatic risks that make their incomes unstable and unpredictable from year to year (Hazell et al., 2010). In order to minimize such agricultural problems index insurance program is being developed in Ethiopia. Hence the study aimed to assess farmer’s understanding to weather index insurance by using panel data of 2010/11 household survey in Tigray region. To achieve the objectives of the study descriptive technique was used. Result showed that 10.85% of the index insurance purchasers do not understand the index insurance well but most of the purchasers i.e. 83.72% of them reported that they have well understanding about insurance and purchase it based on their awareness. We have also found that 43.61% of the respondent reports that insurance could cover part of their loss while 20.30% of them reports that insurance covers full lost of crop as a result of rain fall problem. As it was explained in the previous section payout is possible only when rainfall was below the pre determined level in the area (the agreed threshold) but only 24.06% of the respondents know this fact. Based on the result, the study recommends that; repeated training program should be given to the society about index insurance and expanding awareness until they really understand it especially about the loss coverage and rain full problem. Then after, expanding weather index insurance program, in all the drought prone areas of this region. Households could increase purchasing the weather index insurance, through this production or economic capacity of households and living standard of the rural society in general could improve over time. Finally, this study is left open for further research as index insurance is at its early stage in the study area, so there should be continuous follow up and research on this area.
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