Incofin’s Rural Finance Partnership technical assistance program promotes smallholder resilience to climate change through innovative agricultural insurance
Through its Rural Finance Partnership technical assistance program, Incofin IM is supporting two local microfinance institutions (MFIs) – Fundenuse and Micrédito – to implement the first ever meso-model agricultural index insurance product in Nicaragua.
Designed jointly by project coordinator MG Consulting, AXA XL Reinsurance and local Nicaraguan insurance company Iniser, the coverage aims to boost the resilience of smallholder farmers to increasingly frequent and destructive weather events that threaten agricultural production and rural livelihoods. The coverage will help protect 6,000 coffee and basic grain farmers, more than 90% of which possess fewer than 10 hectares of land, from economic shocks related to drought and excess rain.
The product’s innovation lies in its unique design. Whereas traditional insurance schemes would require administering individual policies for each farmer, in this case, the MFI acts as policy holder and risk aggregator. Payouts are triggered based on pre-established rainfall indexes measured via satellite precipitation data. This setup reduces basis risk and administrative costs, making the coverage more accessible compared to traditional models.
After being approved by the Nicaraguan Superintendence for Banks and Other Financial Institutions (SIBOIF, by its Spanish acronym), the product triggered its first payout in September 2018 due to the ongoing drought in Central America, which has already caused significant crop losses1. The MFIs will use the insurance payout to restructure loans of the most vulnerable farmers in the affected regions, preventing these clients from falling into arrears and eliminating the need to sell off productive assets in order to repay their loans.
In an effort to scale up the initiative, Incofin IM, MG Consulting and AXA XL are supporting a third Nicaraguan MFI, Financiera Fundeser, to implement a similar product adapted to the needs of their agricultural clients. If approved by SIBOIF, this product will help protect an additional 12,000 smallholder coffee farmers from the adverse economic effects of flooding during Nicaragua’s rainy season.
The project is jointly financed by the US-based Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank Group, the Dutch development bank FMO and Belgium-based social impact fund Incofin cvso.