Transforming agricultural insurance

From satellite data to premium pricing, lessons from current insurance initiatives were shared by experts at the recent 'Scaling up Agricultural Adaptation through Insurance' event held in Bonn, Germany. "Various stakeholders were brought together to pool their expertise," said Olu Ajayi, CTA's senior programme coordinator and lead specialist on climate change and agriculture, who led a panel session at the event co-hosted by CTA, the CGIAR Research Program on Climate Change, Agriculture and Food Security and the Syngenta Foundation for Sustainable Agriculture.

Uncertainty over how climate change risks will evolve over the next decade currently limits private sector insurance provision to farmers, states Annette Detken, head of division at KfW Development Bank. She adds that, until demand for insurance is great enough to offer economies of scale, new product development will be slow.

However, by reducing the need for costly risk-adjustment, index-based products are making insurance more affordable for farmers, notes Ulrich Hess, senior advisor at German development agency, GIZ. Improved satellite data is a 'game-changer'; now available for free online, for example by universities, it allows insurers to reduce farmer premiums. Such data is being used successfully and sustainably in insurance schemes in Africa, India and South America, he continues. The use of satellite data also allows claims to be paid more quickly, adds Detken.

Innovations in other forms of big data - huge data sets that can be analysed computationally to reveal patterns and trends - further support the agri-insurance market. Alibaba's Ant Financial arm is using big data on transactions to assess client risk in an agri-lending push led by China that will involve an insurance offering, explains Hess.

The digital delivery of insurance policies, increasingly bundled together with input loans or including a loan specifically to cover the premium, is also cutting insurance costs and lifting availability. In Zambia, NWK Agri-Services offers insurance to cotton farmers who receive credit to buy coverage, delaying farmers' payment of the premium until they have income from their harvest. Around 52,000 out of the 70,000 Zambian farmers it works with took up the offer in 2016.

In Paraguay, is working with the state agricultural bank and planning to roll out credit-linked weather insurance based on satellite data to smallholders within the next few months. However, combining credit with insurance is not a perfect solution and can make a loan seem expensive, slowing its take-up by smallholders. Lenders should cut interest rates to reflect the lower risk insured farmers present, argues Rahab Kariuki, managing director at ACRE Africa.

As the impact of extreme weather risks become more visible, there is a much stronger political will to address them, triggering several international initiatives, states Detken. For example, the G7 Initiative on Climate Risk Insurance launched in 2015, InsuResilience, aims to increase access to direct or indirect insurance coverage for up to 400 million people in developing countries by 2020. Detken adds that, with €505 million already pledged, the initiative sends a strong signal to the private sector, whose feedback has been 'very positive'.

However, for the use of insurance to grow, better education is required, says Kariuki, noting that perhaps only two in 10 farmers are aware of insurance and just one understands how it works. This issue could be tackled by insurance industry bodies or regulators, and investment in expertise. More skilled intermediaries such as technical brokers are needed, as is better training to produce qualified loss-adjusters, adds Kariuki.

Subsidies too are essential. Governments could, for example, shift existing funds for post-disaster relief towards pre-disaster insurance, argues Hess. Private sector firms could also offer 'smart subsidies' that support their own business interests. For example, in initiatives where input companies have teamed up with insurers to offer African farmers free germination insurance - guaranteeing them a replacement bag of seeds if germination does not occur within 21 days - has demonstrated the benefit of insurance to farmers, many of whom then opt to buy coverage for the rest of the season, emphasises Kariuki.