> Posted by Annalisa Bianchessi, Microinsurance Network

The Financial Inclusion 2020 campaign at the Center for Financial Inclusion at Accion is building a movement toward full financial inclusion by 2020. This blog series spotlights financial inclusion efforts around the globe, shares insights from the FI2020 consultative process and highlights findings from “Mapping the Invisible Market.

Although Africa has 17 percent of the world’s pastures and arable land, the value of premiums for agricultural insurance in Africa represents less than 0.7 percent of the world’s total. This remarkably low figure is deplorable when one considers that about 60 percent of the active population in Africa is working in the agricultural sector and that with the advent of climate change the risks in agricultural activities are becoming even more frequent and severe. The agriculture insurance sector in Africa is also unevenly distributed, with sector development in West Africa restricted to a handful of countries such as Nigeria, Benin, Senegal, Burkina Faso, Mali, and Ghana. Should governments intervene to support the development of the agricultural insurance sector in Africa?

For smallholder farmers, agriculture insurance offsets risks associated with weather fluctuations. This risk reduction can make it more likely that a farmer will qualify for credit and thus invest in the tools and resources (e.g. seed, fertilizer, labor) needed prior to harvest that would potentially increase crop yields. Furthermore, it also provides farmers with the peace of mind required to invest savings into businesses and increases their confidence to engage in contracts with buyers and processors.

According to Ismaïla Diakité, President of COPROCUMA, a farmer cooperative in Mali, and spokesperson for a network of 500 cooperatives representing over 500,000 Malian farmers, “Microinsurance is an avenue for the people of Mali to develop our country.” Ismaïla recalls that a few years back, COPROCUMA had taken out a loan to sow 10,000 hectares of sesame seed. However due to bad weather the crop failed, and the cooperative and farmers ended up in debt. It was then that they realized the value of insurance. While very lucky (the lending institution cancelled their debt), the farmers embarked on an agriculture insurance scheme, which today is compulsory for all members of their cooperative. Ismaïla says, “Our main objective is to ensure the survival of our farmers, their life and their livelihood.” To this end, he believes that insurance is an essential part of the benefits that the cooperative needs to offer the farmers. When asked whether all farmers are happy with the compulsory insurance scheme he says, “A farmer cannot see the importance of microinsurance until he can see the bigger picture. In the sector I work in there will never be unanimous agreement on anything. However a few years into the insurance scheme, 80 percent of farmers in Mali are now convinced of the importance of agriculture microinsurance.”

Currently, the greatest hopes for bringing agriculture microinsurance to scale in Africa lie in the development of index insurance. This approach to insurance provision pays out benefits on the basis of a predetermined index (e.g. rainfall level, livestock mortality rates) for loss of assets and investments resulting from weather and catastrophic events, without requiring the traditional services of insurance claims assessors to assess individual losses. The main advantage of this type of insurance is the potential for a faster and more objective claims settlement process, with a significant reduction in costs. With the development of new technologies for the management of insurance schemes, such as the adoption of mobile payments, costs have the potential to drop even further. As the dynamics regulating claim payments are known to both parties at the onset, index insurance also reduces the information asymmetry between clients and insurers on the risks insured, something that continues to be an issue for classic insurance schemes.

Initial pilot studies in index insurance schemes are showing promising results, especially with mixed products where the basis-risk (the discrepancy between the measurement and the actual level of risk on the ground of a given index) for individual farmers can be reduced. However, there are some drawbacks which still need to be overcome for index insurance to really take off. Until now, the number of different crop types that this type of insurance can cover has been very limited. Furthermore, the availability of reliable historical data is paramount to ensure appropriate, fair, and viable pricing both for client and insurer, and the upfront cost of setting up the requisite infrastructure for generating, collecting, and processing this data is generally too high for any company to take on. What is needed is infrastructure financing at a larger scale.

At the conference “La microassurance agricole en Afrique de l’Ouest : réalités et perspectives”, held in Paris in February, an expert panel moderated by Philippe Guichandut, Director of Development and Technical Assistance at the Grameen Credit Agricole Foundation discussed how to improve the adoption of agricultural insurance in West Africa, including the ideal level and nature of government intervention. While opinions varied on this issue, there was unanimous agreement that government subsidies are necessary for agriculture insurance to be viable and affordable, especially in the launching phase, and for the sector to reach scale.

Financial support is needed primarily in the shape of premium subsidies (in North America, the largest agriculture market, subsidies reach 73 percent of crop insurance premiums), but it may also include public reinsurance, or assistance for setting up the infrastructure (e.g. weather stations, satellites, data processing, and analysis expertise) enabling the availability of the data essential for index insurance schemes to work. Of course, government support needs to be devised carefully and should not substitute for good design and management of the insurance scheme itself. Lessons on how not to do it can be drawn from experiences all over the world.  One may argue that the long-term sustainability of a scheme is dependent on whether there is a business case for it. It is indeed the hope of many that with the improved use of technology and availability of reliable historical data, agriculture index insurance will in time constitute a viable business for a range of key crops. However, it can also be argued that the case for agriculture insurance goes beyond the business case, as it has an important role to play in ensuring the well-being of societies, including food security and economic development in both developing and developed countries.

On the panel, Jean-Christophe Debar, Director of the FARM Foundation, and Francois-Xavier Albouy, Vice-President at Planet Guarantee, underlined that the cost of financial support to develop the agriculture insurance sector has to be measured against the costs of non-insurance, a cost that includes both lives and food security in Africa. When measured on such a scale, it becomes clear that governments worldwide, and especially in West Africa, undoubtedly have a key role and also a huge responsibility in supporting the development of the agriculture insurance sector.

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