Farms of less than 2 hectares are predominant across the African continent. These are particularly vulnerable to climatic events and other crop damages. They could consider index insurance as an attractive option. Due to their limited access to financing and insurance, small-scale farmers have little resilience, whether it be for transforming their organization, expanding, or coping with damages. Compared to other continents, Africa remains underinsured in the agricultural sector. In 2017, only 1% of small African farmers were insured, compared to 15% of their South American counterparts and 50% for those in the Asian region.
In 2020, Allianz Re, the reinsurance branch of the German group of the same name, conducted a study on the agricultural sector. It appears that African agricultural insurance amounts to $320 million, only 2% of the total premiums paid on the continent, excluding life insurance. Out of the $46 billion in global premiums, 60% concern the United States and China. The African continent is far behind, with South Africa leading the way. Following are Morocco, Botswana, Zambia, and Nigeria, all contributing more than $10 million in premiums annually. West and Central Africa lag behind, remaining underinsured.
In recent years, African governments have realized that agricultural insurance represents a lever for productive capacity and food security. Initial collaborations with private insurers allow offering index insurance coverage to the agricultural sector. For example, in Zimbabwe, Blue Marble Microinsurance launched a pilot project for index insurance with the intention of stabilizing the incomes of small-scale farmers. Since 2016, supported by the World Food Programme (WFP), the company covers meteorological events such as floods, droughts, or cyclones. In 2023, over $200,000 was paid in compensation for damages.
In Morocco, the government plans to insure 14% of its agricultural land by offering multi-risk climate coverage through the Moroccan Agricultural Mutual Insurance (MAMDA):
– Winds and sandstorms
With the increase in extreme climatic phenomena and governments’ willingness to establish agricultural resilience mechanisms, private insurers are developing new protection offers for the agricultural sector. The Food and Agriculture Organization (FAO) estimates that nearly a tenth of Africa’s agricultural GDP is affected by climatic events.
Obstacles to Development
The Microinsurance Network, in collaboration with the Munich Re Foundation, published a report entitled “State of Microinsurance 2022,” estimating the African market’s potential for agricultural microinsurance benefits at $7 billion. This report is based on data collected from more than 250 providers on nearly 1,000 insurance products offered in about 30 countries in Africa, as well as in Asia and Latin America. While this study reveals the opportunity for insurers to develop offerings in Africa, they face some obstacles.
The main obstacle is cultural resistance. Farmers believe they are paying for an unnecessary service if damages do not occur over an extended period. They are accustomed to managing uncertainties as they arise, and prevention has a cost they cannot afford financially.
Additionally, the market is not financially viable without government intervention, as part of incentive policies including loans, subsidies, and other forms of support. Agricultural enterprises represent the first link in the food sovereignty chain highly advocated by African states. International organizations manage risk support programs, but Africa remains largely under-subsidized (2%) compared to other continents or regions: South America 40%, Asia 20%, etc.
Finally, the principle of index insurance, based on modeled data, can lead to reduced compensation compared to actual damages suffered. Moreover, the parametric basis of the offer may discourage farmers unfamiliar with this concept.
Despite the obstacles, there is a real need related to the threat of climatic uncertainties in agriculture. Establishing a viable agricultural coverage offering depends on the involvement of public or private parties but can count on the growing support of new technologies and Big Data.
The finance sector has already benefited significantly from Africa’s mobile equipment rates, offering various services on the continent, such as online loans and commodity trading platforms.
The consideration of geographical rather than individual data in the context of index insurance offerings also facilitates information collection and dissemination via mobile devices.
The Principle of Index Insurance
With the development of digital technologies, insurers have new tools to better assess risk contexts, depending on the operating areas. The growth in data volume and the emergence of artificial intelligence have favored the development of new insurance offerings, including index insurance. Also called parametric insurance, it is an alternative to traditional insurance when it does not meet needs.
Index insurance mainly concerns risks related to meteorological data. This risk factor now impacts the majority of human activities. However, almost all of these activities are not covered for economic losses related to this factor. The multiplication of agricultural damages caused by extreme climatic episodes and natural disasters supports the development of this form of insurance.
Today, index insurance is of interest to various sectors:
– The energy sector
– The transportation sector
– Tourism activities
– Sports events
– Cultural events
– The construction industry
Depending on the nature of events, damages related to climatic uncertainties are covered:
– Yield losses
– Income losses
– Transport cancellations
– Event postponements
– Construction schedule delays
Index insurance thus covers all damages resulting from the effects of climate change: extreme droughts in Africa, frost in northern countries, monsoons in Asia, etc.
It is easy to understand that renewable energy producers are interested in this coverage, as their production is directly impacted by wind or sunlight intensity.
Airlines also seek this type of “delay” coverage. In most contracts, coverage is triggered after a certain number of hours of delay. The same goes for event organizers subject to weather whims.
Insurers are increasingly offering innovative leisure-targeted offerings. Vacationers deprived of sun during their stay can now purchase dedicated coverage.
Insurers are more hesitant to engage in the agricultural sector for the reasons mentioned earlier, especially at the beginning of the value chain. Downstream, they offer coverage for food transporters. For example, shipowners insure against damages caused by bad weather. Index insurance then takes into account wave levels to trigger coverage.
The International Finance Corporation (IFC), a subsidiary of the World Bank Group, manages the Global Index Insurance Facility (GIIF) program, aiming to facilitate access to index insurance for farmers or herders. The program’s partners offer offerings for nine sub-Saharan African countries. Around 100,000 farmers benefit from such coverage, and eventually, 250,000 farmers should enjoy this protection. The program also includes workshops to raise awareness of the concept of index insurance.
Source: Ecofin and Atlas Mag