How to Overcome Agri-Insurance Challenges in Emerging Markets
By Maddy Fein
No matter where you are or what type of coverage you need, a common characteristic of insurance is diversification. Agricultural insurance in emerging markets is difficult because of two main factors: lack of diversification and index-based insurance.
A global problem with agricultural insurance is that diversification is difficult to achieve. Catastrophic weather events occur in the same geographic region, so it is often the case that if one farmer is hit by a catastrophe, then all farmers in that area are affected by the same catastrophe. This creates a problem for insurers who must pay claims for everyone in the area that they insure. Depending on the size of the catastrophe, it can sum up to more than the insurer is able to cover. Without any outside assistance, the insurance system in that region can come to a “catastrophic” halt.
This has not been a major issue in the West because indemnity-based insurance products are widely used. Indemnity-based insurance products provide payouts based on the actual loss an individual policyholder incurs. A policyholder can choose coverage for a single peril or for multiple perils, known as peril and multi-peril indemnity based products, respectively.
Indemnity-based products provide substantial coverage, but it comes at a high price tag. The problem is that in emerging markets, indemnity-based insurance is not as popular because smallholder farmers with limited income are unable to afford its high premiums. Instead, index-based insurance products reign king.
Smallholder farmers in emerging markets cannot afford the higher premiums of indemnity-based insurance products.
Index-based insurance coverage provides claim payments based on the deviations from an index rather than actual measured losses. Therefore, no assessment of losses at the individual level is necessary making index-based products quick, easy, and inexpensive to administer.
Indices are commonly based on yield, weather or satellite data. Especially in emerging markets, strong and reliable indices are expensive and difficult to obtain.
Yield data offers the most comprehensive option, but also comes at a high cost to collect and audit the data. When offering an agricultural insurance product to emerging markets, this has been difficult to keep the price tag low.
Weather data is an easier and less expensive way to collect and audit, but it is often inaccurate, leading to improper payout schemes. If implemented poorly, it can create a negative view of insurance for farmers and be detrimental to all parties involved.
Despite all the challenges, there have been some proven strategies in index-based agricultural insurance in emerging markets:
- Obtain accurate data — Diversify data sets, if possible. For example, utilize yield data and satellite data to improve data quality and cost. Any combination of data sets will be advantageous. For instance, a pilot program in India used a weather station to provide payments where necessary. Weather data was quick to obtain so payments were made promptly. Since weather data is not as accurate as yield data, it meant that some farmers affected were not able to file a claim because the weather data did not capture their loss or the entirety of their loss. For those farmers, yield data, when it became available, was used to make additional payments when the original payment, based on weather, did not cover the full extent of their loss. Having multiple datasets help ensure that farmers are properly covered by insurers after a catastrophe.
- Government assistance financially and strategically — Data is expensive. Accurate data is even more costly. There is little financial incentive for an insurance provider to set up its own weather stations to obtain reliable data. Governments need to take a hands-on approach. For example, India’s government offers premium subsidies to make agricultural insurance more affordable to farmers and the Government of Mongolia covers payouts for catastrophic events to ensure insurance companies are not obliterated in extreme weather scenarios. Government financial assistance reduces the premiums for farmers and protects insurance companies against bankruptcy. Additionally, governments can assist in setting up weather stations that can be used by all insurance providers to facilitate obtaining accurate data and to eradicate the high costs for each insurance provider associated with setting up its own weather stations.
- Create trustworthy partnerships — Build local partnerships with government ministries, NGOs, bilaterals, and key stakeholders who are both trustworthy and reliable for agricultural insurance. Farmers must feel comfortable knowing that paying premiums will result in financial incentives when catastrophe hits. However, farmers will only feel comfortable doing so with a well-known, trustworthy, and reliable organization.
- Educate farmers and work with farmers to understand their needs — Farmers must understand how their money will be used, when they will be paid out, and how it will benefit them in order for insurance to scale. Likewise, insurers must understand what type of coverage would benefit its farmers most. Education is an important part of agricultural insurance, for all parties included, not just a small piece of the pie.
- Utilize technology — Use mobile money for payouts, giving farmers immediate funds when catastrophic events hit. Dispersing funds quickly builds trust and ensures that farmers can rebuild quickly after a loss. Look at low-cost technology to reach farmers and assess yields without having to go visit the farm.
