Experts redraw insurance model to protect drought-stricken herders

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Published on Tuesday, 05 April 2011 10:34

The development of the financial services sector, fast-tracked through international initiatives, is emerging as potentially transformatory for agriculture in East Africa, with up to 40,000 farmers in Kenya and Rwanda now set to gain from an entirely novel insurance scheme designed to protect regional farmer’s from losses to crops and livestock caused by bad weather.

 The insurance comes at a time when Kenya is still recovering from a prolonged drought in 2009 that claimed many herds of livestock especially in the north where pastoralism is widespread. The failure of short rains in many parts of the country and consecutive poor rains for the previous two years also placed over 10 million Kenyans on emergency relief aid, with the president announcing the drought as a national disaster.

The new insurance now being put in place to offer farmers protection against such catastrophes has been launched under the Global Index Insurance Facility (GIIF) of the private sector arm of the World Bank, The International Finance Corporation.

The local partners are Syngenta Foundation for Sustainable Agriculture, UAP Insurance, the International Livestock Research Institute (ILRI), and MicroEnsure in Rwanda. Farmers will access the insurance through UAP Insurance and ILRI regional offices. However, what they will be buying amounts to an entirely new insurance model.

With traditional insurance, a farmer insures crops for loss and if 20 per cent of the crop yield is damaged, the insurance company pays damages. The system is blamed for creating ‘moral hazard’, and requires that claims are individually checked for actual yield loss, leading to high transaction costs and the frequent need to subsidize premiums.

The poor results of this insurance for both the insured and the insurer and the complexities involved have provided little incentive to expand insurance provision into the emerging or frontier markets, where it is needed most.

But under the new index-based insurance scheme, losses resulting from weather and natural catastrophes will be valued using an index. For example, insurance will be paid out in the event of drought that is defined as less than an anticipated amount of rain, or of a wind storm of certain category, or an earthquake registering a certain Richter scale and within a fixed distance. Any of these kinds of events will qualify for pay-outs as soon as the statistical indexes are triggered, irrespective of the actual loss, and without having to wait for claims to be settled in the traditional way.

IFC is injecting a grant of up to $2.4m to Syngenta Foundation for Sustainable Agriculture, which expects to insure 20,000 farmers in Kenya over the next three years; an additional $154,000 to ILRI, which expects to help insure 5,000 livestock herders in northern Kenya over the next two years; and $1.6m to MicroEnsure, which expects to insure 15,000 farmers in Rwanda over the next three years.

The grants will fund advisory activities, including local capacity building, infrastructure development, product development, and the development of local insurance companies’ capacity to provide index-based insurance products.

Already the Livestock Institute in collaboration with UAP insurance and Equity Bank has rolled out a pilot scheme in Marsabit with impressive results. ILRI spent four years on the project, through research to market survey, to achieve a commercially sustainable solution.

Based on the fact that livestock in the area relies entirely on foraged food, ILRI drew on data from satellites to create a Normalized Difference Vegetation Index (NDVI), an indicator of vegetation levels.

When vegetation levels drop, as a consequence of drought or poor weather, farmers are given a payout. To insure a herd of 10 cows, the premium is Sh3500. ILRI argues that while this sounds high, paying out less than a third of the value of a single cow, in insurance for a herd of 10, would amount to a real protection.

However, the insurance has also had to be adjusted for the likelihood of drought, withherders in the more drought prone of Upper Marsabit paying higher than counterparts in Lower Marsabit. “"The percentage premium will depend on the area. Upper Marsabit is more drought prone and the premium will be 5.5% of the value of the livestock whereas in Lower Marsabit people will pay 3.25%,"said Brenda Wandera, the Project Development Manager.

Already, 1,979 insurance covers have been sold since the project was officially launched in the area in January this year.this has been despite the newness od the concept. “We are talking about people who have no prior knowledge of what insurance is, and here we are telling them to protect their animals through paying out money. It wasn’t hard to convince them,” says Ms Wandera.

However, the emotional attachment the herders have to livestock has seen the scheme taking hold. “They used to rely on fortune tellers for weather prediction, but due to global warming and unpredictable weather, even fortune tellers have failed, and the recent drought has shaken them and forced them to seek means to protect their livestock,” says Ms Wandera. The 2009 drought left dead 300,000 goats and sheep in the area of a population of around two million in Turkana District.

In selling the benefits of the index insurance, ILRI has also run sessions playing insurance based games with herders highlighting the practical returns. If successful in Kenya, ILRI hopes to roll the same scheme out to herders in Ethiopia next year, and eventually to offer it across the whole region.

Say local experts such as Michael Ameripus, who works with Vets Without Borders in northern Kenya's Turkana district, and was cited by the BBC: "Insurance would offer people here a great boost, and encourage banks to give farmers loans and credits since they now have their insured livestock as collateral."

Said Jean Philippe Prosper, IFC Director for Eastern and Southern Africa, during the signing agreement ceremony: “These partnerships highlight IFC’s commitment to expanding insurance and other financial products where they are needed most in Africa.”

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