Kenya is set to introduce new rules to regulate the key tool used in offering weather-related risk insurance and compel insurers to compensate customers within 10 days, in a move to shield farmers, households and businesses from the growing financial shocks of climate change through insurance.
The draft Insurance (Index Insurance) Regulations 2025, will govern the setting of premiums and settlement of claims under index-based insurance, a type of insurance that pays out claims based on a pre-determined index, such as rainfall or satellite-recorded vegetation levels, rather than an individual claim assessment.
Until now, insurers have been developing and rolling out climate change-related insurance, such as covers for livestock and crops, without a clear legal framework to guide their implementation and the protection of policyholders.
Under the proposed framework, insurers offering index insurance —also known as parametric insurance— will be required to design fair, transparent and scientifically sound products and settle claims within 10 days.
Currently, there is no legal timeframe within which insurers must settle such index-insurance risks.
Unlike conventional insurance, which pays out following a physical assessment of loss, index insurance automatically triggers payouts when a pre-agreed, measurable indicator, such as rainfall levels, temperature or vegetation indices, crosses a set threshold.
“An insurer shall make payouts within ten days after the index has been triggered,” the draft states.
The proposals will tighten oversight by requiring the pre-approval of the Insurance Regulatory Authority (IRA) for every index product. The rules also empower the IRA to impose penalties of up to Sh1 million on insurers who will fail to comply, or to cancel their licence or direct them to take remedial action.
The purpose of the cover is to protect farmers and pastoralists against drought and floods by using data to determine when payouts should be made. For example, if rainfall drops below a pre-set threshold or satellite imagery reveals significant pasture loss, payments are automatically triggered.
“An index insurance product may be designed such that the index triggers payment by the insurer before the occurrence of the insured risk, where the payment is designed, at least in part, to compensate the policyholder for meeting the costs of preparing for, and mitigating the effect of, the insured risk,” the draft states.
According to the draft, insurers must minimise “basis risk,” which occurs when the data trigger does not perfectly match actual losses.
Insurers will be required to submit detailed documentation, including policy wording, pricing and an explanation of how the index was developed.
Independent calculating agents, who are responsible for computing triggers and payouts, will also be vetted and recognised by the IRA.
Index-based insurance is gaining popularity in the wake of the rising severity and frequency of climate change-related events such as floods and droughts.
The model has already been successfully implemented in markets such as India, Latin America and the Caribbean, where parametric insurance has become a key tool for disaster risk financing.
For instance, the Caribbean Catastrophe Risk Insurance Facility (CCRIF) pays member states within two weeks of a hurricane or earthquake, while African Risk Capacity (ARC) offers similar drought coverage to African countries.
In Kenya, most of the products have so far been offered through donor-backed schemes, targeting arid and semi-arid lands.
Index-based insurance is crucial for Kenya, given that the its agricultural sector, which accounts for nearly a quarter of the value of the economy, has been battered by recurrent droughts and unpredictable rainfall.
The rules are designed to integrate insurance into the country’s climate adaptation and disaster response strategies, positioning climate insurance as an effective means of absorbing shocks.
