The role of governments in scaling up agriculture (index) insurance

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Trends impacting rural and agricultural finance & insurance

• Upsurge of private investments in agri-food sectorDemand on agricultural

produce & new consumption patterns

• Increase in remittance flows, 30-40 % goes to rural areas, most of which is involved with agriculture linked activitiesMigration• Threat for rural communities and farmers, e.g. 95% of

African agriculture or 60% of agriculture in India still depending on rain

Climate Change

• Revolutionizing provision of rural financial services 1.7 billion of the 2.5 billion people still lacking access to finance have a mobile phone – new channels

• Value Chains can reduce the risks of agricultural finance and enhance creditworthiness of small farmers. Aggregation possibilities too

Innovation:Technology

Value Chain Financing

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The role of governments in scaling up agriculture (index) insurance

Presenter:Peter Wrede

World Bank Group

Presenter:Vincent Githinji NgariGovernment of Kenya

Presenter:Lena Heron

USAID

Facilitator:Pranav Prashad

Impact Insurance Facility

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Disaster funds

Insurance

(international) humanitarian assistance

Poll 1: To deal with agricultural shocks, should governments best rely on…

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Perspectives on the role of governments in scaling up agriculture (index) insurance

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Peter Wrede

Agriculture Risk Deserves Attention!

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FOOD

SECURIT

Y

3.1 billion people live in rural areas, representing 70% of the world’s poorest people

Agriculture employs 1.3 billion people globally, of which 97% are in developing countries

cereal yield is 1.1 ton per hectare East & West Africa compared to 2.7 tons in North Africa & 3.7 tons in Asia

Climate Change and increasing weather-related disasters will further affect food security

Take Africa, • where agriculture contributes

50% to total export value and 21% to GDP

• where irrigation is scarce and exposure to drought is high

• where small shifts in temperature and rainfall have disproportionate impacts on production

• Take Cameroon, where a 14% reduction in rainfall is estimated to cause US$ 4.65 billion economic losses

Underinvestment in agricultural inputs results in low crop yields in the developing world

What Governments Already Do

2011

2007

What Governments Already Do

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• Input subsidies including finance• Minimum producer prices

• Emergency / disaster relief• Loan forgiveness

• Premium subsidies• Subsidies for operating costs• Reinsurance• State owned / initiated insurers• Regulation of index insurance• R&D, training• Provide data (meteorological, yield)• Micro / insurance / awareness• Promote public private

partnerships

Estimated Government Subsidies as Percentage of Producer Premium, 2007

Example Risk Market Infrastructure for II

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Key functions

Premium volume per farmer or herderLow

(e.g. low-income countries)

High(e.g. high-income

countries)Enabling legal and regulatory framework

Public sector functions

 

Public sector functions

Consumer protection  Public information campaigns  (Compulsion/Nudging)  (Public insurer of last resort)  (Insurance premium subsidies)  (Offer indexed social safety net)  Index definition

Public or private sector functions, but coordination may be

efficientPrivate sector

competition can be efficient

Index financingIndex data collection and auditingIndex database managementHistorical analysis of index/technical pricingAccess to international reinsurance marketsProduct design (using common indices) Private sector

competition can be efficient

 Commercial underwriting and pricing  Distribution/Delivery  

RISK MARKET INFRASTRUCTURE IN LICS

What Governments Can Do (more of)

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How Governments Can Be Helped

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Some examples of support provided by the WBG:• India transformation• CIMA, Kenya and Uganda regulation• Mongolia innovation• West Africa weather stations• Mozambique product design & process orchestration• Kenya innovation• Uruguay, Argentina, Guatemala, DR macro-level feasibility• Bangladesh fiscal & welfare evaluation of options• South Africa inform policy decisions• Weather grids in DR, Mozambique, and Central America as well as agriculture risk assessments in many countries

Premium Subsidy Revisited – Be Smarter Smarter

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For everyone

For vulnerable farmers & pastoralists

Not at all

Poll 2: Should agriculture insurance premium be subsidised

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Government involvement in the Kenya Livestock Insurance Program

Vincent Githinji Ngari

Case for insurance

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• Kenya remains vulnerable to frequent and extremely expensive natural disasters;

• High frequency of flooding (every year) and drought (every 2-4 years);

• 2000 – 2011: Government of Kenya spent on average KES 4.2 billion on post-disaster relief per year;

• 2008 - 2011: Total drought losses to Kenyan economy: KES 968.6 billion and reduction of GDP by 2.8% each year. 72% of this loss is related to livestock;

• Severe droughts results in upto 9% mortality of livestock;• It is a policy of current Government to use insurance intervention

to cushion pastoralists from the effects of drought.

Project Area and Livestock Wealth

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Kenya ASALs Livestock Wealth• 14 target ASAL pastoral

counties have;• 9.16 M cattle= 52.5%• 13.50M sheep= 78.8% • 21.03M goats= 75.8%• 2.96M camels= 99.6%

Impact of Drought on Key Sectors of the Economy

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• Systemic Drought exposure: 28 Droughts last 100 years, 4 in last 10 years

• Frequency and Intensity increasing

• 2008 -2011: 4 consecutive years drought:– Total value damages and losses US$

12.1 billion– Agriculture US$ 1.51 billion (12.5%)– Livestock US$ 8.74 billion (72.2%)– 9% national livestock herd died – mostly

cattle

• Food Insecurity due to drought:– 2009 = 3.8 million people– 2011 = 3.75 million people affected,

• 1.8 million in marginal crop areas• 1.9 million people in marginal

pastoral areas

12.5%

72.2%

0.4%

0.7%

0.5%

0.7%

0.4%

3.3%

9.1%

0.1%

AgricultureLivestockFisheriesAgro IndustryHealthNutritionEducationEnergyWater and sanitationEnvironment, tourism etc

Centrality of Livestock Economy and Risk Profile

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1. Livestock is the principle asset and key source of income

2. Pastoralists carry a heavy risk burden of which severe drought is the greatest

3. Drought-related livestock mortality is the greatest source of vulnerability

Design of the KLIP

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• Forage availability as determined by satellite data will trigger payout. Asset protection cover;

• National government provide (as a start) 100% premium support for 5 tropical livestock units (TLU) belonging to vulnerable pastoralists;

• The insurer and beneficiaries will make arrangements for top up and voluntary cover;

• The insuring company will make payouts directly to the accounts/mobile payment systems of the beneficiaries when there is a trigger

Use of NDVI data

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GreenGood forage availability. This is above normal and stable forage condition.

Yellow The forage situation is positive but consistently worsening.

OrangeThe division in question is under considerable stress but not yet serious.

Red Drought situation is serious but not yet classified as severe.

Black Severe drought condition.

KLIP Investment Plan

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Year 14/15 15/16 16/17 17/18 18/19 19/20

Total Budget 85 131 400 1,095 1,080 1,128

Premiums Budget KES (M)

56.1 100 342 770 770 770

% investment to beneficiaries

66.0 76.3 85.5 70.3 71.3 68.3

% Capacity building, O&M

34 23.7 14.5 29.7 28.7 31.7

Max Potential Payout KES (M)

351 636 2,175 4,900 4,900 4,900

H/H 5,012 9,085 31,070 70,000 70,000 70,000

No of people 30,072 54,510 186,420 420,000 420,000 420,000

% of Human Pop in ASAL

0.4 0.7 2.4 5.4 5.4 5.4

TLU 25,060 45,425 155,350 350,000 350,000 350,000

% TLU in ASAL 0.15 0.3 0.9 2.1 2.1 2.1

Role of State and Local Governments

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• Creation of conducive policy, regulatory and business environment;

• Resource mobilization for programs that increase the reach of insurance to citizens;

• Capacity building/awareness creation of stakeholders;• Private sector mobilization;• Development of supportive infrastructure (eg, roads,

ICT systems);• Data collection and management;• Developing risk management programs that

complement insurance

Challenges

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• Lack of an electronic registration system for information management, managing payouts and communication;

• Inadequate knowledge on insurance, as a risk management tool, by policy makers, extension staff and pastoralists;

• Inadequate local expertise to develop index insurance tools;

• Limited banking network/mobile for payment distribution

Yes

No

Poll 3: Can agriculture insurance be expected to mitigate the risks that climate change poses to small scale farmers in developing countries?

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Lena Heron

Government as enabler and user of insurance instruments

Local capacity to design and market appropriate productsThin data environment which makes design difficult and drive up premium costs (do to uncertainty)Low/no initial volume prevents private sector entry (first mover)Weak distribution channelsUninformed consumers

Some constraints to insurance market development in LICs

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Government role in insurance market development

EnablerLegislative and regulatory framework;Oversite including consumer protection; Consumer education and outreach;Data—especially production and loss.

User of InsuranceInsurance as component or extension of safety nets for increased resilience.

Insurance to support agricultural development objectives—increase farmer investment in productive technologies.

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Not all insurance products offer equal protection, even at the same price. . .

If government subsidizes insurance, it should take care to consider options and select instruments to maximize objectives.

Governments should consider client value or “safe minimum standards”, when reviewing insurance products.

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Governments (the public sector)

Insurance companies (the private sector)

Both in cooperation

Poll 4: Is the development and scale of agriculture insurance best achieved by…

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Use of index insurance require close partnership between government, insurers, research, and development partners to develop and improve insurance tools, products and services for resource poor farmers and herders

Governments have an important role -both as enabler and as a user of insurance instruments. Without strong public private partnerships, we are unlikely to see insurance as a viable tool to manage risk is LICs

Governments function differently than private sector companies, but for agriculture insurance, both sides are well advised to make the effort to understand each other and meet at eye level

Concluding thoughts

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The role of governments in scaling up agriculture (index) insurance

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Q&A

Peter WredeWorld Bank Group

Vincent Githinji NgariGovernment of Kenya

Lena HeronUSAID

Pranav PrashadImpact Insurance Facility

Effectiveness of NDVI and other remote sensing techniques as against on ground weather stations. Would a combination work better?‒ Other Challenges with NDVI- converting images to numerical data

Effectiveness and efficiency of new technologies like drones

Role that the government can play in combining index products with additional services (e.g. better agri. inputs), access to credit and government DRM programs‒ How can these deliver better value for the clients

Snap-shot of chat-box discussions

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How can government interventions help farmers to increase their investment in productive techniques and technologies? What is required to make it effective?

Role for reinsurers in helping governments implement large programmes

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Snap-shot of chat-box discussions contd.