Index insurance pushes farmers closer to cover

The development of the financial services sector is emerging as potential boon to agriculture in East Africa, with up to 40,000 farmers in Kenya and Rwanda set to gain from a new insurance scheme targeting losses to bad weather.

The scheme comes at a time when Kenya is recovering from a prolonged drought in 2009 that claimed herds of livestock especially in the north where pastoralism is widespread.

The failure of short rains in many parts of the country and consecutive dry spell for previous two years also placed more than 10 million Kenyans on emergency relief aid, with the president terming the drought a national disaster.

High costs

The scheme has been launched under the Global Index Insurance Facility (GIIF) of the International Finance Corporation, the private sector arm of the World Bank.

The local partners are Syngenta Foundation for Sustainable Agriculture, UAP Insurance, the International Livestock Research Institute (ILRI) and MicroEnsure in Rwanda.

Farmers will access the scheme through UAP Insurance and ILRI regional offices.

Traditionally, farmers who insured their crops were only compensated if at least 20 per cent of yield was damaged, leading to concerns the rules were creating ‘moral hazard’ and checking claims individually.

This led to high transaction costs, hence the frequent need to subsidise premiums.

These conditions, among others, have been blamed for slow expansion of products into emerging or frontier markets.

However, this will likely change under the insurance scheme where losses resulting from weather and natural catastrophes will be rated using an index.

Payment will be arranged in the event of less than anticipated rain (drought), a wind storm of certain category, or an earthquake as registered on the Richter scale and within a certain distance.

Any of these will qualify for pay-out after the figures are confirmed, irrespective of actual loss and without waiting for claims to be settled.

IFC is injecting a grant of up to $2.4 million to Syngenta, which expects to insure 20,000 farmers in Kenya over the next three years; an additional $154,000 to ILRI, which will insure 5,000 livestock herders in northern Kenya over the next two years; and $1.6 million to MicroEnsure, which expects to insure 15,000 farmers in Rwanda over the next three years.

The grants will fund programmes like training, infrastructure development, product development, and equipping insurers to adopt the index-based plan when indemnifying farmers.