Dossier

Climate insurance

Increasingly accessible agricultural data is facilitating the scaling out of index-based insurance schemes and helping farmers build resilience and adapt to climate change. 

A weather monitoring station in Goromonzi, Zimbabwe, used to collect data for local farmers to receive index-based insurance and plan their harvests © FAO/T. Ogolla
A weather monitoring station in Goromonzi, Zimbabwe, used to collect data for local farmers to receive index-based insurance and plan their harvests © FAO/T. Ogolla

Wednesday, 05 July 2017

Closing the gap in agricultural data available to smallholder farmers and financial institutions in developing countries is essential for the agricultural sector to build resilience and adapt to climate change. Without accurate farming and weather data, smallholder farmers struggle to prepare for unpredictable climate events and tend to prioritise managing risk over maximising revenues.

The lack of agricultural information and data available in ACP countries presents significant difficulties for agricultural risk management and leaves smallholder farmers acutely vulnerable to the impacts of climate change. On average, farmers sacrifice 12-15% of their annual income to reduce risk using traditional coping mechanisms, including liquidating productive assets, defaulting on loans and over-diversifying the types of crop they cultivate – methods which are often ineffective and counterproductive.  

Between 1995 and 2015 there were 7,000 natural disasters, and 308 million people in Africa alone were affected by such instances. The increasing risk of climate shocks, such as drought, flooding and heatwaves, act as a disincentive for farmers to invest in valuable inputs and agricultural technologies that increase productivity and yields, like fertilisers and improved seeds. Even if farmers were inclined to invest in such technologies, financial organisations are reluctant to offer farmers credit to buy them without available evidence proving their capacity to repay loans. 

The rise of big data 

However, as the revolutionary impact that big data can have on the food chain is being realised, investment in agricultural technology has increased by 80% each year since 2012. This influx in capital has not only resulted in the development of precise remote sensing technology and other data collection tools – explored in a recent Spore article on precision agriculture – but has also seen the emergence of private sector agricultural data analytics companies. Farmers Business Network, an American start-up that aims to democratise information, provide unbiased analytics and create business competition in the agricultural sector, recently received €36 million worth of investment from well-known venture capital firms, including GV and DBL Partners. Other similarly focused companies are broadening their data collection and reach to agriculture in the developing world. Gro Intelligence has designed a subscription-service software called Clews, which acts as a search engine to provide data analytics across a broad range of agricultural data from around the world. The company makes complex analysis of environmental data, based on satellite imagery, crop production, trade flows and demographics, both simple and accessible for a multitude of users.  

The CGIAR Platform for Big Data in Agriculture, launched at the beginning of 2017 with more than 70 external partners, is also joining the trend for agricultural data. The platform brings together thousands of experts, from crop scientists to computer programmers, to collect, process and analyse vast amounts of data on crops, weather and soils, etc. Commenting on the potential of this platform, Andy Jarvis, research director at CIAT, confirmed that, “With enough data and enough analysts, we’ll be able to say if the rains will be late or on-time… We’ll be able to anticipate shocks, reduce risks and maximise opportunities for profitable, sustainable agriculture.” 

The availability of vast quantities of localised agricultural data is useful for facilitating farmers and policymakers in making timely decisions in response to the impacts of climate change. However, Sara Menker, Ethiopian born CEO and founder of Gro Intelligence, is more preoccupied by the potential of reliable statistics to evaluate, monitor and measure farming activities for encouraging commercial investment. When interviewed on solving the food crisis at the World Economic Forum, she outlined the importance of data in one simple question: “How are you going to price the risk of a farmer if you don’t actually understand what production cycles of agriculture look like in a particular location in Africa?”  

Index-based insurance 

In this respect, the growth in the availability of agricultural data has not only encouraged more widespread provision of financial services to smallholder farmers in ACP regions, but also allowed for the introduction of index-based insurance, which offers a viable solution to the challenges of risk management in a changing environment. Rather than insurance pay outs based on individual yield losses or damage and health costs for livestock – like traditional indemnity-based insurance – index-based insurance does not depend on high-cost farm visits to make individual impact assessments. Instead, indemnities are based on an ‘index’ of values relating to variables that impact agricultural productivity, such as rainfall over time or vegetation status across a region.   

To create these indexes, insurance providers need access to accurate and timely agricultural data, which is where companies like aWhere come in. Each day, aWhere collects more than 7 billion data points across the planet, which provide real-time, localised weather information and field-level agronomic intelligence across the agricultural value chain. Through a partnership with CTA’s Market-Led, User-Owned, ICT4Ag-Enabled Information Service project, aWhere’s data is being used to offer smallholder farmers in Uganda crop insurance packaged with weather alerts and agronomic tips. Similarly, an initiative focused on improving the availability and use of climate information at both local and national levels, Enhancing National Climate Services (ENACTS), is providing the necessary data for index-based insurance for smallholder farmers in Ethiopia. 

ENACTS scientists improve the accessibility of climate data by combining quality-controlled data from national rain-gauge networks with satellite estimates for rainfall, elevation maps, and re-analysis products for temperature. This data is then made available online through ENACTS ‘Maprooms’. The Maprooms are used by insurers to compare farmers’ measurements from manual rain gauges with ENACTS rainfall monitoring data to evaluate the accuracy of insurance pay outs – this comparison has been used across hundreds of villages in Ethiopia by the R4 Rural Resilience insurance initiative. 

Scaling out insurance products 

As remote sensing technology and other data collection tools become increasingly available, the potential for index-based insurance to be scaled out to smallholder farmers across ACP regions is now being realised. A collaborative partnership of private sector, governmental and not-for-profit organisations in Zambia, led by non-profit company Musika, successfully insured over 60,000 farming households against drought and other adverse weather events in Zambia during the 2015/16 season. Agrotosh Mookerjee, a micro-insurance actuary consultant working on the project states that, “This is an incredibly exciting watershed moment where we have succeeded in scaling up agricultural insurance to a level where we're working with tens of thousands of farmers, on a self-sustainable basis and we have some innovative features in the product to manage basis risk and maximise client value, while still being commercially viable for the insurers and re-insurers."  

Another success story can be found in Ghana where smallholder farmers are receiving insurance pay outs from WorldCover, triggered automatically by satellites monitoring rainfall levels. The private sector company promises investors a transparent risk model, which limits downside risk and provides positive expected returns. This level of protection from natural disasters and other climate related phenomenon, lowers farmers’ credit risk so that financial institutions are more inclined to issue loans, allowing them to invest in more productive inputs without worrying about extreme weather conditions ruining their ability to generate returns on such investments. Despite the evident value of such insurance schemes and the existence of 652,975 programmes that insure farmers in Africa and over 3 million agricultural insurance programmes in Latin America; 90% of the world’s smallholders still have no access to crop insurance. To assess the challenges that need to be addressed in order to broaden the reach of these index-based insurance programmes, CTA co-hosted a conference on ‘Scaling up agricultural adaptation through insurance’ in Bonn, Germany, on 14 May 2017 (for an overview of the key issues raised at the conference see Spore’s latest finance article). 

Where next? 

Examining the experiences of existent index-based insurance programmes for agriculture, two significant challenges commonly arise. Firstly, the difficulty of increasing farmer uptake of insurance products. This ultimately stems from a lack of understanding and trust among farmers of the benefits of agricultural insurance and the accountability of financial institutions to issue pay outs on time. As Rahab Kariuki, managing director of micro-insurance product designer, ACRE Africa, noted at the Bonn conference, in many native languages a word for insurance does not even exist. A concerted effort, therefore, needs to be made by agricultural insurance providers to educate farmers and increase their awareness of the potential remunerations of insurance. Dan Osgood, a lead scientist at the International Research Institute for Climate and Society, summarised that in order to persuade them to invest in insurance, “farmers need the data and science at their fingertips.”  

Not only is clear and transparent information about insurance products essential to increase farmer uptake, but the products must also be more available and responsive to farmers needs to convince them to buy into insurance. In order to achieve this, farmers should be consulted during the design process of insurance products, and larger commercial farms with more disposable income should be targeted first to prove the benefits of index-based weather insurance to smaller farmers so that they have the confidence to invest. The second key issue that is frequently raised in regards to index-based insurance is the question of whether it can ever be commercially viable. In order to act as a sustainable solution to climate change, agricultural insurance needs to attract private sector investment.  

At the conference in Bonn, the concept of bundling index-based insurance in a package with other financial and information services to make it more financially feasible for private sector investors was a common theme. Ishmael Sunga, CEO of the Southern African Confederation of Agricultural Unions, stated that “Insurance alone is not enough, it should be provided in conjunction with complimentary services and inputs.” The provision of a selection of services to help mitigate the risks of climate change has been shown to be more attractive to farmers, as well as to the private sector. Bearing this in mind, CTA’s Flagship Project in Southern Africa is focused on promoting the scaling up of weather-based insurance alongside three other proven climate-resistant solutions for cereal and livestock farmers: drought-tolerant seeds, improved climate information services and options to help livestock farmers diversify. With this bundle of services, CTA aims to improve the climate resilience of 200,000 Southern African smallholder farm households, primarily in Malawi, Zambia and Zimbabwe.

Bundling insurance with improved seed varieties

To increase adoption of both drought insurance services and drought-tolerant seeds by Eastern African farmers, a CGIAR-led project is combining the two climate-smart tools in a bundled package. Despite the increased availability of climate-adapted germplasm, Jon Hellin, a researcher at the International Maize and Wheat Improvement Center (CIMMYT), explains that, “unfortunately, threats like drought – the very reason for adopting climate adapted crop varieties – also represent a huge risk that makes farmers reluctant to invest in new technologies such as drought tolerant seed.” However, “Bundling the seed with a risk mitigation tool such as index insurance, provides fantastic opportunities for increasing farmers use of climate-smart agricultural technologies and practices,” he states.

With the knowledge that they will automatically receive compensation from insurance providers if rainfall is under an agreed threshold, smallholder farmers can be more confident about investing in increasing the climate resilience of their farms. The project is, therefore, working with farmers, insurers, re-insurers and seed companies to develop appropriate index insurance products to bundle with climate-adapted germplasm.

Through a partnership with the Drought Tolerant Maize for Africa Seed Scaling Project and the Agriculture and Climate Risk Enterprise (ACRE), CIMMYT is exploring possibilities for incorporating drought tolerant maize seed into a replanting guarantee offered by ACRE to farmers. To trigger the replanting guarantee farmers have to text a code, which can be found inside each bag of maize seed, to ACRE at the time of planting; their farm will then be monitored using satellite imagery for 21 days. If the drought index is triggered during this time farmers are automatically paid for their losses via M-Pesa, a mobile money service, so that they can buy a new bag of seed. The insurance premium for this coverage is incorporated into the price of the maize seed, ensuring that smallholder farmers do not encounter any additional costs.

ACRE currently provides insurance services for inputs – including replanting guarantees for other seed varieties – harvests, and livestock to 800,000 smallholders in Eastern Africa, a figure that is projected to increase to 3 million by 2018. By collaborating with the largest index insurance provider in the developing world, CIMMYT intends to strengthen the reach and uptake of its tailored insurance products, and by 2019 deliver bundled services to 400,000 farmers in Eastern Africa’s drought-prone areas via the seed supply chain.

To learn more about climate insurance in action read our field report on Climate Risk Adaptation and Insurance in the Caribbean

Stephanie Lynch

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The Technical Centre for Agricultural and Rural Cooperation (CTA) is a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). CTA operates under the framework of the Cotonou Agreement and is funded by the EU.