Microinsurance in Africa

I agree completely with this article that we need significant expansion in micro-insurance. Our organization One Acre Fund provides farm input loans and training to 130,000 smallholder Africa farmers. Hard-working farmers are some of the worst-suited to have risk in their lives, and we are grateful for the protection that Kilimo Salama rain-index insurance brings to our farmers. We have been a proud partner of theirs from the beginning. We encourage further innovation in the field to bring harvest-index insurance to small-holders.

FESA Micro-Insurance has developed drought and excessive precipitation insurance that reaches every farmer in Africa. Drought index is the relative evapotranspiration (RE) derived from Meteosat. This index is proportional to crop growth and more suitable to cover yield deficits than precipitation. The data are available from 1982 up to date on a 3 km grid across Africa. Using the RE index drought insurance has been developed for partners like PlaNet Guarantee, Microensure, Syngenta Foundation and FSD-Kenya. Pilot projects are running in Mali, Burkina Faso, Benin, Kenya, Tanzania and Rwanda, mostly in the GIIF framework and reinsured by Swiss Re. FESA allows easy scaling up. In West Africa FESA is currently addressing 840 different locations, sufficient to cover several hundred thousands of smallholders. Costs of insurance development, maintenance and monitoring at scales over 100.000 is about half a dollar per insured, or about 5% of the insurance premium. This is commercially feasible.

The technology has been described in the report “FESA Micro-Insurance: methodology, validation, contract design”. Anyone interested please contact us at fesa@ears.nl.

MicroEnsure started working on providing a range of insurance products to the poor in 2002. We had the first weather index product launched in 2004 in Malawi and now provide these valuable weather insurance products in Malawi, Rwanda, Tanzania, India and the Philippines. But we also provide a range of products including life, property and health insurance through microfinance lenders as well as a number of mobile phone companies. Globally we are serving in excess of 4m customers of which 2m are in Africa and we are doing it sustainably, admittedly with a helping hand from the Bill & Melinda Gates Foundation. We are just in the process of a major equity investment from some large global commercial companies - micro insurance is a viable proposition.

Thank you for highlighting this promising tool to protect the farming populations in developing countries and not only stabilize but increase their incomes through risk transfer.

Despite the beauty of the concept, however, there are many reasons why success stories of sustainable agriculture microinsurance are scarce so far.

Also in developed countries and mature insurance markets, agriculture insurance is not often sustainable, but substantially subsidized. But whereas in developed countries farmers are familiar with insurance and exposure to risk more often does lead to demand for insurance, I don’t think this is the case for the vast majority of smallholder farmers that microinsurance targets. Need is not the same as demand.

There are several reasons why need for microinsurance seldom translates into evidenced demand for microinsurance. One is the lack of familiarity with the concept – rather than talking about financial literacy or capacity building, I think what is missing is competence: that is, the comfort that I as client know enough about what is being proposed so that I can make the right choice in respect of purchase and use of this novel concept. I believe this also explains the surprisingly slow uptake of mobile phone banking services in most countries. Competence comes not just from being told but from having done, from own experience, from practice.

But while practicing insurance is generally much more difficult than practicing mobile banking, it is particularly difficult for agriculture and other weather related insurance. Because insurance is not designed to pay to everyone every year. And while other types of insurance such as health or death or accident pay to someone every year if the risk pool is large enough, and while many others will see it work for that beneficiary, weather insurance pays to everyone or no-one. So in the years that the payment is not triggered, no one sees insurance at work, and whatever competence had led to the initial purchase wears off, instead of encouraging others to join. Add to that the low trust in the insurance establishment that often results from decades of unresponsive state insurance monopolies not yet forgotten, and the disappointing scale of most agriculture microinsurance schemes is not surprising. That probably explains why in some experiments it is the risk averse who refuse insurance - even when subsidized.

Other experiments seem to show that not much financial literacy is required to understand the concept of basis risk, and that farmers who feel they are better off and will thus subsidize others prefer not to buy insurance, a perfectly rational behavior. So far basis risk is the price to pay for affordable claims handling cost. The FESA RE index drought insurance seems to be a very promising solution. I hope it will generate enough trust among its constituents that they don’t question the index – the total intransparency of most indices to anyone but a few experts being another obstacle to wholehearted acceptance of such schemes.

The proliferation of agriculture microinsurance and the interest it attracted among practitioners, donors and researchers is incredibly encouraging. But more patience is needed. Familiarity with insurance in general, competence in the use of agriculture microinsurance, and trust in those who provide it takes time to root and grow. In the face of climate change, we have to double our efforts.

Africa provides already a huge variety of experiences and lessons learnt when it comes to pooling risks in groups: tontines, ROSCAs, informal insurance schemes, and not to forget the role of mutuals and cooperatives. Different kind of groups, defined by kinship, trade or other, have and are still helping each other out based on the solidarity priniciple. Today, social erosion and economic developments show the limitations of these schemes and demonstrate that it is the time to scale up risk management alternatives with real value. Insurance schemes play a crucial role, as the two previous posts illustrate, but in addition to increasing supply and get more insurers involved with already established large networks for maximum outreach, we need to apply a holistic approach targetting capacity building on all levels; social protection mechanisms and government involvement; and supportive regulation and pragmatic supervision. The Microinsurance Network provides a space for exchange and reflection to work out these challenges.
The next conference, hosted by the Munich Re Foundation and the Network, will be held in Tanzania in November 2012 (http://www.microinsurancenetwork.org/conference.php). Although an international conference, many panels will focus on the African experience and a new landscape study will be distributed.

No doubt that “we need better cross-stakeholder partnerships.” These will mean balancing Return on Investment expectations for various stakeholders. For certain partnerships, it will even mean measuring the “societal impact” of insurance in the ROI equation because that’s what some stakeholder capital demands.

Risk-transfer and risk-pooling play a vital role in society: with crops insured against drought or flood, farmers can plant an extra acre; with medicines secured for a family’s eventual need, small budgets can stretch for new opportunity. As Dougal points out, such benefit is not always achieved at a commercial profit margin… there’s good reason why it isn’t and potentially why it needn’t:

Whether one looks at “microinsurance” or McDonalds, not every pilot venture returns a profit. Insurance for vulnerable households remains in relative infancy. Few programs have run 5 years whereas the average period to turn a life insurance license profitable is 7 years. A substantial amount of the “microinsurance” activity discussed openly is best classed as R&D… making for an even more volatile portfolio.

Dougal asks “how to create sustainable (by which I mean commercially viable) insurance markets” to serve the low-income segment. This risks assuming that commercial insurers are the only ones who will benefit from investment in the low-income insurance market. Actually, much of the benefit accrues not to the specific insurance instrument but to “society” (or other actors within society)… through more secure funding of contingency; longer term deployment of savings; and improved certainty for entrepreneurial development in low-income areas. Profit may be the simplest measure for a regulated and traded market entity in its market but it doesn’t tell the whole story for the expansion of an industry… especially where other stakeholders are involved.

Cross-stakeholder platforms will include government (eg through PPP), donors, impact investors, and distribution partners from different industries. These partnerships are especially critical for innovation or scaling work. The increasing pace of such partnerships is good news. It will be great news to have a generally accepted accounting principle for societal impact.

Agricultural Micro insurance has had some initial bottlenecks. For weather index programs, inadequate historical weather data has caused a slow down in modelling the products, as basis risk is deemed to high.
For the conventional crop insurance products, getting the critical numbers of farmers to justify crop inspections is a challenge. Getting the aggregators to marshal the numbers is difficult as few organizations support small scale farming.Financial institutions consider small scale farming too risky to lend to, yet these farmers need to use high cost inputs to produce bumper crops. This will in turn improve their livelihoods by increasing incomes & improving food security.
From our experiences at CIC Insurance, banks are willing to lend to farmers, so long as the risks of weather are taken care by insurance. We feel it's just a matter of time before banks take crop insurance as a normal collateral for loans.
When this is done , insurance will be loaded onto the loans and this will certainly work to raise the critical mass for crop insurance.
The approach should be to charge market rates for this insurance. When the numbers are attained, premiums will likely be affordable to farmers.
The catch however is the lending rates by banks. Why wouldn't banks reduce their rates to the extent that crop insurance reduces the risk of default?
Looking at things critically, small scale farmers are the most critical segment of sub-Saharan Africa production. If their lives are improved, majority of poverty will be removed.
Consider this"Kenya’s agriculture is predominantly small-scale farming mainly in the high-potential areas. Production is carried out on farms averaging 0.2–3 ha, mostly on a commercial basis. This small-scale production accounts for 75 per cent of the total agricultural output and 70 per cent of marketed agricultural produce. Small-scale farmers
produce over 70 percent of maize, 65 per cent of coffee, 50 per cent of tea, 80 per cent of milk, 85 per cent of fish, and 70 per cent of beef and related products".

Michael Waigwa, Agricultural Underwriter, CIC Insurance Group Ltd.

Interested in microinsurance? How do developing countries handle their unique risks? Learn more at: http://www.healthcaretownhall.com/?p=4615

As mentioned above, micro-insurance products work best when they are engineered to help unlock productive opportunities for poor farmers. Links with financing, credit opportunities, work for food safety net programs, and informal group mechanisms are big parts of the insurance projects in the article. However, we should not forget that the most important thing is to have strong local partners.

For example, in the Ethiopia project discussed above, we have found the Relief Society of Tigray (REST) to be key to success. REST has not only done the legwork for the project but also brought in its networks and trust. These are necessary in order to work closely with local farmers and communities, the key to the bottom-up, farmer driven design process. The direct personal communication with farmers was especially important for the sophisticated (and free) satellite tools used in the Ethiopia insurance project--not only to educate farmers about what kinds of things the satellites can and cannot do, but also to engineer the satellite products themselves. Each village developed its own customized and verified solution, only launched after the village leadership had signed off on it. Combining these elements, the project has overcome many of the challenges faced by index insurance, with the project having high levels of demand, massive scaleup and real impacts.

At the International Research Institute for Climate and Society (IRI), we have worked with many great partners on these, and other projects. If you are curious about more on this stuff, check out http://www.agriskmanagementforum.org/farmd/content/geospatial-data-agric... and http://iri.columbia.edu/csp2, or get in touch with us via Twitter (@climatesociety).

Thanks to Dougal for starting this blog, and I agree with quite a few previous interventions that the picture pained may be partial and a bit simplistic. How can there be weather index insurance in most countries in Africa (akin to the model described in the opener) in places where the density of weather stations is too sparse to deliver relevant parametric strike points? This is the case in e.g. Malawi, Zambia, Zimbabwe, Swaziland and virtually all the center and west of Africa.
Moreover, it has been shown that parametric insurance (e.g. agri insurance where the payout is triggered by gaps in rainfall compared to a benchmark) has been a huge failure in India and other Asian countries, because even in villages with identical rainfall, there can be significant differences in area-yield. Another reason is the gap between farmers`risk (composed of inputs, outputs and market fluctuations of prices for cash crop) and what the insurance covers (most often only the inputs, to the extent of loans taken for input purchases); farmers with these insurance policies still cannot cover many risks to crop (e.g. pestilence, damages to germination due to extreme cold spells, short_term lack of water at critical times of plant development etc). Add to that that in most agri insurance, payouts have occurred many months after the end of the crop season, so even with payout the relief is not very suitable.

Dougal`s definition of sustainability points why there is insufficient interest to get it right. As pointed out by Brandon, profitability cycles in insurance run between 7 and 10 years, whereas the typical agri insurance projects run to 2 or 3 years. These projects rarely deal with creating a deeper knowledge of farmers`exposure (in such ways as Hazard mapping techniques that would identify more accurately the risk, rather than measure just how many financiers have coerced their borrowers to pay for compulsive insurance for loans to buy agri inputs, referred to by one contributor in this blog). I would say that sustainability of food security cannot and should not be measured by profit taking at every separate segment of the value chain; thus, maybe it is desirable for overall country-level sustainability to subsidize the reinsurance premium for agri insurance of farmers ex ante, thereby pooling large crop surfaces at premium-to-farmer that are low enough to attract voluntary purchase (and diversify risks which lead to lower variance=lower avg premium) rather than to pay damages ex-post.
In summary, I wish to draw attention to 3 points;
1. Agri insurance needs to match the complexity of agri production; the financial result of farmers is rarely measurable accurately by a single parameter, and so parametric insurance needs to be revisited. Area_yield may be a better way to go in terms of compensating for yield loss
2. Farmers are clearly interested in the end result of their effort, not just in partial repayment of inputs to the lenders. Just as moneylenders do not provide a systemic and sustained solution for access to capital for the poor, insurance of only agri inputs purchased with loans is not a sustained systemic solution for farm insurance.
3. Do not even try to demand that farmers should pay for the full cost of weather stations and similar infrastructure costs before they can get suitable insurance. This is neither fair, nor will this be sustainable for them, and their answer to unsustainable "solutions" is to leave farming. That risk has never yet been tackled by any insurer, but society at large is definitely exposed to it.

This article is taken from the perspective of the micro client. Many micro clients do not usually have much disposable income. Therefore every coin counts. I agree with one of the bloggers that the risk averse clients are unlikely to take up insurance. They want to see where it has worked before they risk the little extra cash they have and ensure that they reap a benefit. Obviously the benefits can only be seen where there is a catastrophe and when there is none, the insurance is percieved as a waste of money. There is also the need for education without which it is unlikely to go far. The client needs to understand what is in it for them.

This article and all the comments are very valuable. and clearly the topic of agri insurance for small scale farmers is important, and i hope index insurance brings in a start of solution. In West Africa, like in some other places in Africa, the food security issue is getting more and more complicated. The weather variability and particularly droughts and floods have a direct consequence, farmers see their yield lowered, and sometimes strongly.

What we are experience this year, more accurately, is that banks and microfinance institutions are not lending money to farmers or cooperatives. If they do so, they tend to wait as long as possible, in order to limit their risk at the minimum. But farmers can then not purchase neither their inputs... nor their insurance product. And they need both. we notice a very strong demand from farmers in our project Assurance Récolte Sahel, and from lenders particularly. Unfortunately, the very high credit default rates of the 2011 campaign slowed the distirbusement process in 2012. And we must say that index insurance covers drough, excess of rain, yield variations... but does not fully covers the risk of default.

This said, farmers have not the capacity to purchase directly the product, since they are at the worse moment in the year (they need to invest and have no more money). In Sahel areas, there is only 1 rain season a year. And index insurance product, without subsidies are often too expensive to be paid cash at this moment. This is the reason why we need to bundle the product with other products (such as credit, inputs...). And we notice that invesment requested by such programmes are very high (in product development and IT tools).

This allows to lower the final price but after some time. In this, we can say that donors have already done a lot. We are on the edge, index insurance shall show lng term sustainability in the very coming years. But the necessary investment (in distribution tools via mobile devices, satellite methodologis, management and information systems..) are high and must be supported by donors. Experiences proved that index insurance was efficient, we must strenghten our effort in this sense.