Weather insurance is a financial product aiming to help African farmers manage the volatility of drought and other weather crises. This week (14 Jan), IFC (www.ifc.org) signed 2 grant agreements with MicroEnsure Ltd to make more index-based weather insurance available to small-scale farmers in Rwanda and Zambia. Index-based insurance pays out on the basis of agreed weather data, such as rainfall as measured being lower than an agreed level, and is more efficient risk management tool than traditional indemnity-based agricultural insurance, which runs up high transaction costs and premiums.
The grants, valued together at about $650,000, aim to help mitigate the adverse effects of climate change and to strengthen food security. The funds come from the Global Index Insurance Facility (GIIF), which is a multi-donor trust fund implemented by IFC and the World Bank and funded by the European Union, Netherlands and Japan.
The GIIF grants are expected to help MicroEnsure to offer index-based insurance to an extra 90,000 small-scale farmers in Rwanda within 2 years and 15,000 small-scale farmers in Zambia within one year. Index-based insurance, which pays out benefits on the basis of weather data without costly field verification of losses, is a more efficient risk management tool.
Much of the farmland in Rwanda and Zambia, as in many other parts of Africa, is irrigated only by rain, and certain regions are vulnerable to drought from too little rain and floods and destruction from too much rain. To limit their losses due to extreme weather, smallholder farmers make minimal investments into their land, leading to reduced yields and continued food insecurity.
UK-based MicroEnsure has been operating since 2002 and works with mobile-network operators, banks, microfinance institutions, and other aggregators to provide insurance for the mass market. Shareholders include some of its managers and IFC, Omidyar Network and Opportunity International, which created MicroEnsure in 2005. It has a regional base in Nairobi and country operations across Africa and Asia. It has twice been awarded the Financial Times/IFC Sustainable Finance Award. The company has worked with local insurance companies in India, Malawi, the Philippines, Rwanda and Tanzania.
In Rwanda 90% of the labour force work in agriculture and in 2010 IFC agreed with MicroEnsure to design and provide index-based insurance and develop an outreach network to small farmers, while scaling up the insurance into a commercially viable and sustainable product. By March 2012, 6,208 maize and rice farmers were reported to be covered with weather station and satellite index products, with the aim to boost coverage to 24,000 farmers by December 2013. It works in Rwanda with Urwego Opportunity Bank which is a subsidiary of Opportunity International and local insurance companies Sonawara and Soros.
In Tanzania, MicroEnsure’s pilot project (Dec 2011-Apr 2012) worked to provide weather index insurance to 24,000 Tanzanian cotton farmers through the Tanzanian Cotton Board, supported by Gatsby Foundation, local underwriter Golden Crescent and a technical partnership agreement with reinsurer Swiss Re. It covers cover for value of inputs provided to farmers on credit.
IFC has also backed Kilimo Salama (“safe agriculture”) in Kenya to offer cover for inputs in the event of drought or excessive rainfall, in a partnership between Syngenta Foundation for Sustainable Agriculture and Kenyan insurance company UAP. Also available is cover for farm-output value, estimated on the expected harvest. A Nov 2010 grant from GIIF encouraged Syngenta to develop the product further, which uses weather stations to collect rainfall data and mobile SMS technology to distribute and administer payouts. It
Richard Leftley, CEO MicroEnsure and MicroEnsure Asia, said in an emailed press release: “As a pioneer in the provision of weather-index insurance to smallholders since 2004 we have seen the impact that these products have in unlocking credit to fund inputs, resulting in a dramatic increase in yields and rural income. Our on-going relationship with the team at IFC has been central to our growth in this sector.”
Gilles Galludec, IFC GIIF programme manager, said: “There is great potential for index insurance to strengthen economic security for smallholder farmers in Rwanda and Zambia while also serving to further the development of sustainable insurance markets in both countries. A reduction in weather-related risks also stimulates investment in farming by making it viable for financial institutions and agribusinesses to extend credit to smallholder farmers for long-term investment in the land. Index-based insurance is a powerful tool in the fight against poverty.”
GIIF is a multi-donor trust fund, launched in Africa in 2009, with the aim of expanding use of index insurance as a risk-management tool in agriculture, food security and disaster-risk reduction. It supports the development and growth of local markets for indexed/catastrophic insurance in developing countries, primarily in Sub-Saharan Africa, Latin America and the Caribbean, South Asia and Southeast Asia.
IFC is a member of the World Bank Group and focuses exclusively on the private sector, working with enterprises in more than 100 countries. Investments climbed to an all-time high of nearly $25 billion in the financial year 2013 www.ifc.org
The International Livestock Research Institute (www.ilri.org) is another organization backing index-based insurance, this time offering livestock cover for vulnerable pastoralists in Kenya and Ethiopia to cut climate-related risk. The product is called index-based livestock insurance and was launched in Marsabit District of Kenya in Jan 2010 with insurer UAP (it made payouts in Oct 2011 and Mar 2012) and in Ethiopia’s Borana zone in Jul 2012. For more information, see here. The product uses econometrics to measure links between livestock mortality and a Normalized Difference Vegetation Index (NDVI).