Why farmers shun insurance cover despite the huge risks

NAIROBI: Agriculture has become a risky enterprise due to its cyclical nature, risk of loss from drought, floods, pests and diseases, fires and natural disasters. Research shows frequency and severity of crop failure and livestock mortality have increased over the years.

Because of the highly variable climate where any season can bring harsh conditions, farmers have been reluctant to invest in more profitable technologies and practices. This lack of investment, has led to unpredictable yields, a major factor keeping farmers trapped in poverty.
Mitigation of these risks is a priority to reducing income loss, increase agricultural productivity and enhance farmer’s well-being.

Given these growing concerns about impact of climate change, crop insurance – though not a new concept – has gained recognition and support from both public and private institutions as an important risk management tool.

INDEXES

The uptake of insurance services in the agricultural sector is generally low compared to other sectors of the economy like manufacturing and services sectors.

Farmers regard insurance as an unnecessary expense rather than an investment to curb future risk, especially given the small size of their farm holdings. Whether such an assessment is based on economic rationale or on mere opinions, is still a subject of debate.

Recent innovations in the insurance market have led to development of pro-poor weather index insurance to promote affordable insurance service delivery among farmers. Index-based insurance overcomes the obstacles to insuring smallholder farmers against weather-related risks.

With index insurance, payouts are based on an objectively measured index that is correlated with farmers’ losses rather than actual losses.

Indexes used to represent agricultural risks include rainfall, area-average yield statistics, and vegetation conditions measured by satellites. When an index exceeds a certain threshold, farmers receive a fast, efficient payout, in some cases delivered via mobile phone.

However, the issue of how to achieve scalability and sustainability of weather index insurance poses a considerable challenge for policy makers.

EXPERIENCE, CHALLENGES, ISSUES

The uptake of this insurance product in the country has had mixed results. In 2009, the number of households buying insurance stood at 1.3 to 3.5 per cent.

By 2012 the number of households buying crop insurance rose sharply to about 34 per cent. In 2014 the number dipped to a low of 4 to 7 per cent. The question is: what have been the contributing factors for the decline?

Failure to compensate farmers who had been affected by the loss is the most mentioned factor. This is due to basis risk. Basis risk becomes a problem where an individual farmer(s) incurs major crop yield loss, for example, due to rainfall deficit at his location, but does not receive a payout because no rainfall deficit was triggered at the designated measurement weather station.

MITIGATION MEASURE

This situation has been disastrous not only for the farmer(s) who has paid a premium for the rainfall deficit cover but has lost his crop and not received an indemnity, but also it has created a reputational risk for the insurance industry and loss of confidence and acceptance of the product by the farmers and other stakeholders.

Therefore the reduction is as a result of farmers who discontinued purchase of the insurance. Farmers have also been frustrated by too little payout in comparison to the loss incurred.

Weather Index crop insurance guideline is the rainfall as measured at a designated meteorological station and represents a radius of up to 20km if topography is homogeneous: however, discussion with farmers suggests that rainfall patterns may vary over much smaller distances of 5km to 10km. One solution to this problem of basis risk could be to increase the density of weather stations.
Crop Weather Index Insurance only insures one or two key perils. Under the operation of any weather index insurance program there will therefore always be other “uninsured” factors which influence crop production and yields and it is very important that farmers are trained and sensitised to fully understand the policy and that there is a potential they may incur severe crop losses due to other uninsured perils such as pests and or diseases.

Even though majority of the farmers are aware of crop insurance and its benefits, only a few understand how it works, this limits their ability to make decisions with regard to its uptake.

It therefore suggests that awareness on insurance necessary but not sufficient to promote crop insurance uptake. Instead we propose a rigorous training in order to provide enough information to enable farmers understand insurance clearly and thereby demystify the concept.

This is critical since insurance provides farmers with the opportunity to use a critical mitigation measure against the ever increasing risk due to climate variability.

Involving farmers in the design of the products is also crucial in improving uptake of crop insurance. This will ensure that insurance products target crops that farmers consider valuable enough to warrant an insurance cover.

In addition, an efficient and simple communication mechanism that allows for feedback from farmers needs to be put in place in order to enable further refinement of insurance products to reflect farmers’ needs, tastes and preferences. In the design of insurance products, it is important to include approaches capable of lowering basis risk - such as use of multiple triggers and increasing density of weather stations to enhance correlation between insured risk and the relevant weather phenomena.

Uptake can also be enhanced by developing products for high-value crops rather than subsistence crop like maize.

The writer is an expert on sustainable agriculture and agricultural innovations.