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.

ILRI in collaboration with UAP Insurance and Equity Bank has rolled out a pilot scheme in Marsabit.

The institute spent four years on the project, through research to market survey to achieve a commercially sustainable solution.

ILRI drew on data from satellites to create an index on the vegetation levels.

When vegetation levels drop because of drought or poor weather, farmers are paid.

To insure a herd of 10 cows, the premium is Sh3,500, a figure ILRI says offers real protection taking into considering the cost of covering a single cow.

Herders will pay premiums depending on how they are vulnerable to drought, meaning, for example, the Upper Marsabit will pay higher than those in Lower Marsabit.

“The percentage premium will depend on the area. Upper Marsabit is more drought prone and the premium will be 5.5 per cent of the value of the livestock whereas Lower Marsabit will pay 3.25 per cent,” said Brenda Wandera, the project development manager.

Already, 1,979 insurance covers have been sold since project launch in the area in January

“We are talking about people who have no prior knowledge of what insurance is, and here we are telling them to protect their animals through paying out money. It wasn’t hard to convince them,” says Ms Wandera.

However, the emotional attachment the herders have to livestock has seen the scheme taking hold.

“They used to rely on fortune-tellers for weather prediction, but due to global warming and unpredictable weather, even fortune-tellers have failed, and the recent drought has forced them to seek means to protect their livestock,” says Ms Wandera.

The 2009 drought killed 300,000 goats and sheep in the area of a population of around two million in Turkana District.

Great boost

In selling the benefits of the index insurance, ILRI highlighted to herders the benefits of the scheme and the international research organisation says if successful the plan would be extended to herders in Ethiopia next year and the whole of Africa.

Michael Ameripus, who works with Vets Without Borders in northern Kenya’s Turkana District told the BBC: “Insurance would offer people here a great boost, and encourage banks to give farmers loans and credits since they now have their insured livestock as collateral.”

Jean Philippe Prosper, the IFC Director for Eastern and Southern Africa, during the signing agreement said: “These partnerships highlight IFC’s commitment to expanding insurance and other financial products where they are needed most in Africa.”

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