Will agriculture insurance usher in food security?

Agriculture insurance is quickly gaining ground as a way of fighting the cycle of poverty, made worse by natural disasters such as floods and drought which destroy food and kill animals.

In Kenya, recurring drought has meant severe food shortage resulting in deaths of people and animals, slower economic growth, and the shame of begging for food aid.

But agriculture insurance is becoming a popular solution to mitigating against the cycle of poverty created by harvest loss.

Farm input insurance means the farmer will get cash equivalent to the expected harvest.

It also means that affected farmers get inputs without spending new money.

In a country like Kenya where agriculture is a critical economic driver, contributing a quarter of our national wealth, insurance is a priceless service.

However, not many people are able to access the service because of a myriad factors including lack of awareness and shortage of tailor-made products in the market.

To get more insight into how farmers can increase access to agriculture insurance, Business Daily spoke to LOVEMORE FORICHI, an agricultural insurance specialist at Swiss Re.

What delivery models will help increase the use of agriculture insurance in Africa?

The bulk of the business now comes through the broker to insurance company to reinsurer.

We see the need for other stakeholders within the agriculture value chain to be involved, such as investors, micro-financers, input providers, commodity associations and traders.

Investors and input suppliers, for example, can require farmers to assign them the proceeds of insurance as collateral for loans and pre-financing of inputs respectively.

Similarly, commodity traders — who have entered into forward contracts — can require farmers to cover their losses in case of default due to a shortfall in crop production.

Farmers can do so by pledging their insurance title.

By encouraging farmers to hedge their risk with professional risk carriers, such as insurance and reinsurance companies, the impact of volatility can be softened.

Which successful global agriculture insurance models should be replicated in Africa?

At Swiss Re, we have shifted away from a “one size fits all” model to tailor-made solutions.

Based on our global expertise, we are able to design customised solutions both at the farm level and aggregated levels, as well as through the entire value chain.

We offer a number of products, ranging from traditional indemnity-based to index-based solutions. We can even utilise satellite technology.

All these depend on the availability of requisite data, the expertise within the market, and type of client. In Kenya we have provided all three approaches since we have both data and market expertise.

What role should the public sector play in managing agricultural insurance solutions?

Although the advantages of agricultural insurance are almost common knowledge to insurance experts and many large-scale farms, this is often not the case for small scale farmers.

This partially explains the low penetration rate of agricultural insurance.

The potential for agricultural insurance in Africa is huge. In most countries agriculture is the major contributor to economic production and also a major employer.

The public sector can play a role in creating and enabling a regulatory environment that allows insurance and reinsurance companies to successfully operate in these markets.

Secondly, municipalities and local communities can help create awareness of advantages of agricultural insurance so that farmers hear about these products from people they know and trust.

Thirdly, the public sector should replace ad hoc payments after a disaster (ex-post financing) with risk financing before a disaster happens (ex-ante financing).

This allows for better planning to deal with eventualities like pests or disease and builds up a robust rural safety net.

One way to do this might be through premium subsidies, which are common in the US and Europe.

Some insurers have complained that the reinsurance premium for agriculture micro insurance services is high. As a major player in the reinsurance industry, what are your thoughts?

We are not aware of such complaints from our local partners. They understand that each reinsurance contract is negotiated separately, using various parameters.

In the early stages of product development, one has to calculate the costs in relation to the value of the product offering.

The product should then have a successful life span. Our clients see Swiss Re as a partner who is there for the long haul, and who also offers reliability and important expertise besides price.

One of the trends noticeable in Kenya is the commercialisation of small-holder agriculture where farmers maximise use of their land to obtain high yields. How is this trend likely to shape food security and income derived from agriculture?
A farmer, as an entrepreneur, can choose to hedge production, input cost or output price risks by growing crops that improve revenue.

Part of this revenue, for example, can then be reinvested into modern technology such as mechanisation to improve yields.

However, not all small scale farmers will be able to convert their production into fully commercial crops.

These crops often demand high initial investment and a specific micro-climate to be viable.

Therefore, there will still be a sizeable number of farmers cultivating traditional crops.

This is a healthy mix, and would allow for some progression from pure subsistence farming to commercialisation.