Insurance Opportunities against Weather Risks for Smallholder

Farmers in Africa

Francisco Ceballos, IFPRI

Markets, Trade and Institutions Division

With J. Ulimwengu, T. Makombe, and M. Robles

October 27th

• Overview of weather impacts

• Role and types of insurance

• Selected successful projects in Africa

• New developments

Outline

Climate change

World Bank. 2013. Turn Down the Heat: Climate Extremes, Regional Impacts, and the Case for Resilience.

Weather Impacts

Poor Most Affected

Risk coping works…

Savings Credit

Family & Friends

Diversi-fication

ConservativeRisk-Taking

…but imperfect

Savings Credit

Family & Friends

Diversi-fication

ConservativeRisk-Taking

GROWTH POTENTIAL!

• Insurance could unlock productive potential but…

…missing markets

• Traditional, indemnity insurance is costly:• Losses evaluated in person• High administrative costs for rural areas• Correlated risks in agriculture

• Has led to small private provision in rural, remoteareas

Formal Insurance

• Pays out based on objective index• Weather station

• Satellite

• Area-yield

• Lower cost of provision

• But…• still a foreign concept for farmers

• Issue of basis risk

• Generally low demand

• Still, a number of successful experiences in Africa

Index Insurance

R4/HARITA

• Launched in 2009

• 32,000 insuredfarmers in 2015

• Key characteristics:• Holistic approach to

risk management

• Participatory processwith community

• Insurance for work (Drought risk-reduction projects)

• Ethiopia• Senegal• Malawi• Zambia

• Launched in 2009 (Kilimo Salama)

• Largest in Africa -1 million subscribed farmers in 2016

• Key characteristics:• Input and credit-

linked insurance• Use of mobile money• Sources (AWS,

Satellite, Area-yield)

• Kenya• Rwanda• Tanzania

ACRE

• Launched in 2010

• 15,000 pastoralistsinsured since launch

• Key characteristics:• Satellite-based

product (NDVI)

• Livestock mortalityrelated to forageavailability

IBLI (Livestock)

• Kenya• Ethiopia

NEW DEVELOPMENTS

IN INDEX INSURANCE

• African Risk Capacity

• Launched in 2013, African Union

• Key characteristics:• Risk pooling

• Drought coverage, satellite-based

• Technical capacity for emerg. mgmt. plans

• New Outbreak & Epidemic Insurance

• Reach to farmers…

Macro Level

• Natural complementarity

• Example:

DT seedvarieties& Insurancefor extremeevents

• Conservation Agriculture: ↑ tolerance to high temperatures and ↓ risk of lodging

Insurance and CSA

Cover againstmoderate drought

Cover againstextreme drought

Lybbert, and Carter, Bundling Drought Tolerance and Index Insurance to Reduce Rural Household Vulnerability to Drought.Ward, Spielman, Ortega, Kumar, and Minocha, Demand for Complementary Financial and Technological Tools for Managing Drought Risk.

• Leverages increased smartphone ownership

• Base insurance payouts on smartphone pictures

• Reduces basis risk

• Ideal for small-scale, high-value crops

• Shows large potential in initial pilot

Picture-Based Insurance

Kramer, Ceballos, Hufkens et al. Picture-Based Crop Insurance: Using Farmers’ Smartphone Pictures to Minimize the Costs of Loss Verification.Kramer, Ceballos, Krupoff et al. Picture-Based Insurance: Is It Sustainable? Effects on Willingness to Pay, Adverse Selection and Moral Hazard.

Sowing

Harvest

Picture-Based Insurance

• Formal insurance has value for smallholder farmers

• It can help overcome barriers to CSA adoption byreducing risk and uncertainty

• New models relying on technologies can alsocontribute to this sector

• However, high reliance on subsidies leads todifficult policy decisions

• Bringing projects up to scale is a bottleneck thatcan greatly benefit from policymakers’ support

In summary

Kramer, Ceballos, Hufkens et al. Picture-Based Crop Insurance: Using Farmers’ Smartphone Pictures to Minimize the Costs of Loss Verification.Kramer, Ceballos, Krupoff et al. Picture-Based Insurance: Is It Sustainable? Effects on Willingness to Pay, Adverse Selection and Moral Hazard.

THANK YOU!

f.ceballos@cgiar.org