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March 08, 2011

Insurance service to reduce the risk of subsistence farming

Farming is a risky business anywhere in the world, but especially if you are a subsistence farmer in southern Africa, where a few weeks of too much or too little rain can wipe out your one hectare of maize and your ability to feed your family in the coming months.

Thousands of small-scale farmers are faced with this scenario after heavy rains fell across much of the region between mid-December 2010 and February 2011. Government and NGO assistance could take months to reach them, if at all, and many will struggle even to afford seed for the next planting season.

Farmers in the developed world insure their crops against multiple hazards, including extreme weather, but in Africa insurance premiums are beyond the means of most small-scale farmers. Insurers are also reluctant to take on the cost and complexity of designing suitable policies and assessing claims in often remote areas.

But what if the premiums were affordable, and insurers did not have to investigate each individual claim but could rely on meteorological data to trigger payouts?

Weather index-based insurance, a form of micro-insurance, has been generating a buzz in development circles because it has the potential to provide a level of social protection to farmers and their families in flood- and drought-prone developing countries.

Unlike traditional insurance, which requires evidence that a crop has been damaged or destroyed, index-based insurance automatically pays out according to a pre-determined meteorological measure, such as a certain number of days without rain.

"We thought, ‘How can we take away the risk of drought so banks lend to farmers so that they can increase inputs and yield?’" said Richard Leftley, CEO of MicroEnsure, a UK-based company that started offering weather-index insurance in partnership with the World Bank, to groundnut farmers in Malawi in 2004.

The results were impressive. Having insurance allowed the groundnut farmers to secure small loans, making it possible for them to buy better seeds and fertilizer, and eventually increase their yields by as much as 300 percent.

Initially the insurance payouts were triggered by rainfall levels, but as drought is not primarily determined by how much rain has fallen, but by how many days crops have received no rain, farmers started being compensated after a certain number of "dry days."

Index-based insurance relies on weather data to process claims, so farmers have to live within 20 km of a weather station to be insured.

MicroEnsure now runs index-based micro-insurance schemes in Tanzania, Rwanda, India and the Philippines, but a scarcity of functioning weather stations in Malawi has prevented it from reaching more than about 850 farmers, or from expanding to other countries in the region.

The only country in the region with a large number of weather stations and a well developed insurance sector is South Africa, but Shadreck Mapfumo, MicroEnsure's vice-president for agricultural insurance, said most farming there was done by commercial farmers and there was little demand for micro-insurance.

"There's phenomenal demand in other countries in the region, but… [they do not have] the infrastructure," said Mapfumo.

Governments were often willing to build more weather stations but lacked funding. Even when donor funding was secured and more weather stations had been built, three to four years of data were required before an index-based insurance product could be designed and sold.

"Part of the solution... would be a combination of weather stations plus some form of satellite data," said Mapfumo. Index-based insurance schemes in other countries, such as the Philippines and Ethiopia, used information from satellites.

Persuading small-scale farmers to pay even very low premiums for insurance they might never use was another challenge, said Leftley.

Policies typically cost about 10 percent of the value of the insured crop, but after finding that most subsistence farmers were only willing to pay 3 percent to 5 percent, MicroEnsure redesigned its products to cover farmers only during the crucial planting and harvesting seasons.

The low cost of policies means that MicroEnsure has to keep overheads to a minimum by partnering with banks, micro-finance organizations and NGOs to act as its sales arm. The company also has funding from the Bill and Melinda Gates Foundation, which has eased the pressure on its weather-index insurance to generate an immediate profit.

In developed countries agricultural insurance is usually subsidized by government. Doubell Chamberlain, of the Centre for Financial Regulation and Inclusion, a non-profit think-tank based in Cape Town, said most micro-insurance schemes for farmers in Africa were subsidized by NGOs, credit providers, or the distributors of agricultural inputs such as fertilizer.

Leftley is hopeful that micro-insurance for farmers in disaster-prone developing countries could be recognized as a way of adapting to the effects of climate change, allowing access to funding set aside for mitigation to build more weather stations and subsidise premiums.

In the meantime, a programme led by the World Bank's International Finance Corporation (IFC) has helped expand access to index-based insurance for farmers in Kenya and Rwanda, and is currently conducting a feasibility study in Zambia.

Mapfumo cautioned that the insurance did not protect small-scale farmers from other risks, such as low prices for their maize crops, which could prevent them from repaying loans.

"For weather-index schemes to really work well, you have to make sure farmers are getting other assistance," he told IRIN. "In years where you don't have drought, farmers might still not do well because they don't know how to properly look after their crop."


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