Crop insurance unpopular in Africa
THE 43rd Organisation of Eastern and Southern Africa Insurers Conference (OESAI) that was held in Kenya last year reiterated the need to act on the part of insurance players through product innovation in relevant areas such as crop insurance.
New business models combined with new digital technologies can change many insurance markets for the better. e century-old market for crop insurance is no exception. In fact, it is a good example of how purpose-driven insurance can meet the needs of the post-Covid-19 risk landscape.
From an African context, one of the sectors most vulnerable to climate change and weather events is the farming industry. Most farmers in Africa are dependent on rainfall for their crops and their livelihood yet very few are insured against adverse weather events.
A bad farming season can have long-lasting effects on farmers’ financial situations as it
In Zimbabwe, the economic recession in 2019 and 2020 was largely triggered by a drought as well as the impact of Cyclone Idai. e economic outlook in 2021 changed largely because of rainfall patterns.
According to the statement from TwentyFifth Annual Southern Africa Regional Climate Outlook Forum (SARCOF-25), it was expected that the Southern African region would receive normal to above normal rainfall from the period October to December 2021.
e January to March 2022 period was also expected to receive normal to above normal rainfall for most of the region.
While there has been a significant improvement in terms of weather patterns in the region, there are a plethora of reasons why it is important to protect the small farmers in developing countries.
Traditionally farmers in Africa have devised a diverse portfolio of risk avoidance and reduction mechanisms such as reduced input application, use of drought resistant varieties and diversification of crop or income portfolio to self-insure against agricultural risks.
However, research shows that traditional risk minimisation strategies are unfavourable to some extent and they cannot adequately absorb the resultant economic shocks hence leading to a poverty trap.
erefore, risk transfer strategies in form of formal insurance is a suitable tool to:
•Transfer risk to a third-party – in this case an insurer, thereby eliminating fear of risk and encourage investment; and
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Spread covariate risks, for example drought and disease outbreaks across a wider geographical region by pooling risks that individual farmers nor the local risk sharing initiatives like farmer groups or cooperative are incapable.
Overall, a well-designed agricultural insurance can help to mitigate the impact of systemic risks by providing the much-needed protection and contributing to timely recovery in case a disaster strikes.
An important development has been weather index-based insurance. is is a product designed to offer protection against losses caused by extreme or catastrophic weather-related events, such as droughts, floods, typhoons, hurricanes, snowstorms.
Payments to the policyholder are triggered by a pre-agreed index (which should be objective and inde¬pendent). is insurance has been used mainly to mitigate risks in the agriculture and livestock sectors, taken out against extreme weather events, but also used to protect properties and companies against catastrophic events.
Overall, while literature suggests that crop insurance has the potential to unlock key services that enhance farm productivity, the insurance concept is also not well understood by farmers.
In addition, basis risk hinders uptake of crop insurance since farmers exhibit high levels of dissatisfaction with claim payments.
Generally, the concept of agricultural insurance is not popular in Africa except among the large-scale farmers.
Furthermore, even with numerous efforts to avail formal insurance to farmers in low income rural settings through pilot programmes, to date, very little success has been achieved to move index insurance beyond the piloting phase hence the uptake levels remains low.
Affordability of premiums and inaccessibility of crop insurance services especially because of distribution challenges have also hindered its uptake.
Below we highlight some of the key problems inherent in crop insurance:
Adverse selection
Adverse selection arises because producers are better informed about the distribution of their own yields and are thus better able to assess the actuarial fairness of their premiums than the insurer, who lacks access to reliable individual yield data and other relevant information.
Producers who recognise that their expected indemnities exceed their premiums are more likely to purchase coverage than those whose premiums are actuarially high.
As a result, the insurers expected indemnity outlays exceed total premium income, and, in the long run, the insurance operation loses money.
Efforts by the insurer to avoid these losses by raising premiums only result in a smaller and more adversely selected pool of participants.