Public-private finance critical to drive scale in agriculture insurance

Public and private finance will be critical to drive scale in weather-index based agricultural insurance products in sub-Saharan Africa, according to climate risk finance specialist Rahel Diro.

Speaking at an Axa XL-hosted briefing as part of COP26, Diro, who serves as disaster risk finance associate at development-focused engineering firm Tetra Tech, said less than 20 percent of smallholder farms worldwide have access to agriculture insurance, with only 3 percent covered in sub-Saharan Africa.

“In monetary terms this equates to a coverage gap of between $60bn and $80bn, which would represent an annual premium value of $8bn to $15bn,” she said.

Sahel said it would require commercial capital, donor funding and technical assistance to help fill this coverage gap and bring many of the existing index-based insurance projects to scale.

Diro said her experience over the past decade on several programmes that use insurance as a tool to build resilience highlight that there is no silver bullet in determining success.

“What success means will depend on the context. The insurance you develop for Kenya won’t necessarily be right for Ethiopia or Malawi,” she said.

“But the most successful ones put the needs of their clients first, and provide a very tailored approach that gives their customers a voice.”

The R4 Rural Resilience Initiative, launched by the World Food Programme and Oxfam America in 2011, has developed programmes to provide compensation for crop-related losses in 10 countries including Ethiopia, Kenya, Malawi, Senegal and Zambia.

“There are independent assessments that have shown this programme had a meaningful social impact,” she said.

“In Ethiopia, farmers have invested 50 percent of their payouts back into their farms. In Senegal, participants had four times higher food consumption score – a proxy measure for household food security – than non-insured farmers.

“And in Malawi, the number of farmers resorting to negative coping strategies has decreased by 50 percent.”

Diro said her work on these programmes over the past decade had highlighted key elements critical for effectiveness on the ground.

“The first important thing is to develop affordable products that address the risk and vulnerability of farmers, with an emphasis on affordable.

“Within a single season farmers can face different vulnerabilities – understanding those and tailoring products to address them is critical.

“Considering a portfolio approach is very important – farmers need cover for a portfolio of risks on the farm rather than just a single crop.

She said basis risk – the extent to which actual losses may not be picked up by a parametric trigger – are one of the main challenges for weather risk insurance products.

“There are only a limited number of weather station networks in Africa and those that exist may not report consistently.

“But there has been a lot of progress in terms of satellite and remote sensing data sets, with several types of data sets freely available and accessible.”

In addition, she said there have been substantial steps forward in artificial intelligence and machine learning techniques to inform crop analytics over the past decade.

“These have huge potential to improve and further tailor insurance products,” she said. “And could potentially have a big impact in helping drive scale”.