European Microfinance Week 2021

PRESENTATION

This session, led by Rebecca HAUSBERGER from GIZ, started off by stating that every day small-scale farmers face a variety of risks threatening their crops and thus their livelihoods. Many of those risks are extreme weather events like floods and droughts, which are becoming more frequent and severe due to climate change. Many small-scale farmers employ risk mitigating measures to minimise losses, such as the adoption of good agricultural practices, smart crop selection, improved infrastructure, or diversification of activities. However, these actions can be associated with lower yields and income, while -even worse- severe risks often remain. Agricultural insurance is another way to support smallholder farmers to adapt and ensure their continued livelihood, even in the face of disaster.

This session discussed agricultural insurance as a tool to secure small-scale famers against climate risks. There are different types of agricultural insurance products, Hausberger explained, being either indemnity-based or index-based. Indemnity-based products compensate for all covered parts of the damage or loss of the insured items. Claim verification is needed; after extreme weather events this often takes some time, resulting in late pay-outs. Individual claim verification for smallholders is administratively not very feasible, very expensive and can result in unaffordable premiums.

For smallholders index-based products are often the most feasible option. These products do not perfectly correlate with losses, as pay-out is based on predefined triggers like weather indices (example: rainfall, temperature measured at local weather stations) or area yield indices (example: when average regional yield falls below a specified critical yield amount). In case of an extreme weather event, for instance, all insured farms in the affected region will receive a pay-out regardless of their losses.

About half of all farms in lower- and middle-income countries have at least some agricultural insurance, though it typically covers just a small share of their potential losses. Moreover, 95% of all the insured farmers are based in China and India, while only few small farmers elsewhere have any coverage at all, according to Hausberger. With insurance coverage still limited, many governments and donor agencies are actively trying to scale up agricultural insurance, often aided by insurance subsidies..

This is important, according to Peter HAZELL of IFPRI, as most agricultural insurance programmes (60%) are currently being offered by private insurers. These private insurers work on a ‘for profit’ basis, and without subsidies, they are unable to reach most smallholder farmers, as they cannot afford to pay the full cost of the insurance..

Hazell added that a constraint for more private insurer investment in the sector is the lack of public sector support. Governments need to provide an enabling regulatory environment, and support the provision of key data systems needed for insurance (for example, weather stations and remote sensing data). Unpredictable government policies and volatile budgets are key constraints. Insurers want and need stability in government policies and programmes. This would allow private companies to develop new pilots as well as innovative projects and products that keep up with challenges like climate change.

DISCUSSION

A question from the audience was about the motivation for private insurers to enter this market, which seems to be high risk and low profit. Emily COLEMAN of IFAD responded that reinsurance is very important in the conversation on agricultural insurance, as more than half of agricultural insurance programmes are internationally reinsured. She does not believe it is too high risk for reinsurers. What is most important for them is to ensure that there is a good product design and strong underlying data, resulting in lower risks.

However, given the lack of transparency in the sector it is a real challenge to support sound data collection and strong product development. In an ideal world there should be a push for country-owned data, Coleman added, which combines information on ground, weather, and remote data. Public support is key to mine specific and precise data which are suitable for insurers.

Hausberger said that, although it is known that an ideal insurance scheme deals with private insurers and public support, some organisations still tend to do own small projects. She asked the panellists about their opinion on how to better promote collaboration in terms of sharing information and learnings across organisations and possibly sectors.

Coleman answered that the way to success is to embrace that agricultural insurance is not a standalone product or individual approach. Agricultural insurance could, for instance, be integrated with loan finance programmes, as part of a more comprehensive agricultural development and risk management approach. She agreed that within programmes there is a need for stronger collaboration between the public and private sector. She also believes there is still work to do in increasing farmer awareness and understanding of insurance products, indicating a need for training and development of educational materials. Hausberger added the suggestion of organising farmers in meaningful insurance groups to diversify risks and improve sharing of information.

Someone from the audience asked who should bear the costs for making farmers understand insurance and its related benefits: the insurer, the distributor, or the government? Hazell replied that ideally private insurers should educate farmers, but they are reluctant to do so because trained farmers may subsequently buy their insurance from a different company; in short there is a classic public goods problem. Extension service providers trained in insurance, or intermediaries like financial institutions, could play key roles according to Hazell.

Hausberger mentioned that bundling insurance with other products and services is often seen as a tool to incentivise farmers to buy insurance products. In fact, in a survey done by GIZ, about 60% of recent agricultural insurance programmes were initiated by the private sector, and nearly all involve bundling. Hazell commented that, as farmers are reluctant to buy insurance as a pure risk management tool, it is attractive to link it to other products, for instance fertiliser purchases. This also solves a distribution problem for the insurer.

During the session, Hausberger also shared some other trends that support further development of the agricultural insurance market. First, integration of insurance into agricultural value chains through bundling looks like a recipe for success because it makes it more convenient for farmers to buy insurance while adding value.. Second, advances in remote sensing and crop modelling are very important, because the easier it becomes to estimate damages, the cheaper and more precise the insurance product becomes. Third, digital technologies like smart apps, electronic banking and blockchain become more relevant, allowing farmers to purchase insurance, make payments, and access weather info and market prices more easily.