Insurance for Development — Lessons learned: Agricultural Insurance — Product Design Considerations
The course “Insurance for Development” is a unique learning opportunity for professionals to study business models and strategies that help them provide insurance solutions to underserved markets. Throughout September and October 2020, 70 participants from around the world join the ILO’s Impact Insurance Facility and the International Training Centre of the ILO (ITCILO) in a series of webinars and self-paced learning. In this blog, Preeti Sancheti writes about the lessons learned by participants on the topic of agricultural insurance.
Climate is the primary determinant of agricultural productivity. The impact of climatic change on agriculture makes it imperative to provide agricultural insurance to help farmers better manage the risks. The webinar, “Agricultural Insurance — Product Design Considerations”, included presentations by Pranav Prashad (ILO), Charles Stutley (Agriculture insurance expert), Tara Chiu (University of California at Davis) and Dirk Reinhard (Munich Re Foundation).
About 50–70 % of the populations in most developing countries depend on agriculture for their livelihoods; however the penetration of agricultural insurance is very low.
Charles Stutley presented the different types of agricultural insurance products available. The oldest kind of agricultural insurance is indemnity-based. However, this type of insurance is unviable to offer to small farmers as claim investigation to ascertain death of livestock or actual damage on fields is extremely expensive.
In the last two decades, there has been a lot of innovation around index-based insurance products. In index-based insurance, the payouts are made based on a “proxy” for damage based on predetermined triggers or indices. The weather index Insurance uses ground-based weather stations, satellite data and images and other remote sensing techniques to gauge the weather parameters, and accordingly ascertain the loss/damage. The challenge with weather index insurance is that it covers just the weather related risks; however, in certain regions — countries in East Africa for instance — pests and diseases also pose a huge risk. Area yield index insurance (AYII) helps tackle these issues.
AYII is based on the average yield for a large homogeneous area. Here the trigger for payout is when the average yield for the homogeneous area is below an agreed percentage of the historical yield data. Data for at least 10 years is taken into consideration. The average yield for the season is computed using crop cutting exercises (CCE). In CCE, locations are selected based on a random sampling of the total area. The sample plot is analyzed for yield and the data gathered from this study is extrapolated to the entire region to assess the average yield for the region. The key to offering AYII is having good historical yield data and a relatively homogeneous area in terms of agro climatic conditions.
It is important to note that in index-based insurance, the farmer gets a payout at the trigger of an event. The payout is regardless of what actually happens on his or her individual farm. So unlike traditional insurance, there is no need for the farmer to file a claim.
An important aspect of agricultural insurance is providing a high quality product so that the farmer is not left “worse off” after having taken the insurance. Tara Chiu explained that UC Davis is working on a Quality Index Insurance Certification. It strives to ensure that the product is relevant i.e. it provides a payout when there are significant losses experienced by the farmer. If a product is certified as meeting this standard, it can include QUIIC branding in its marketing efforts, allowing farmers to tell the difference between products that offer real value from those that don’t.
Another important piece in making agricultural insurance successful is the distribution. MFIs or banks providing agriculture loans are effective distribution partners. Dirk Reinhard highlighted the importance of effective use of partnerships in offering agricultural insurance. He shared his experience with the Farmer Input Support Programme (FISP) and Weather Index Insurance offered in Zambia. This follows a public private partnership model integrating insurance with the subsidy provided by the government for purchase of farm inputs.
Agriculture is an uncertain business with a lot depending on weather conditions, and although insurance is not a solution to every agricultural risk, it can be an effective one in the basket of services. In future, various remote sensing applications can replace the crop cutting exercise, which can reduce time and manual interventions. This can revolutionize loss assessment and verification in agricultural insurance.
