From Microfinance Gateway: The Transformative Role of Insurance in African Agriculture
Challenges and new models for making agricultural insurance more accessible
The Microfinance Gateway is a media partner for European Microfinance Week where Katharine Pulvermacher and Stewart McCulloch spoke at the session, "The transformative role of insurance in African agriculture." In this Gateway interview, they provide insights on some of the discussions around this issue and the challenges in scaling up agricultural insurance for smallholder farmers.
Gateway: At European Microfinance Week, you were part of a session called "The transformative role of insurance in African agriculture." Why has agricultural insurance been so difficult to sell in the past despite many efforts?
Katharine: For many people in low-resource settings, such as smallholder farmers, their first exposure to insurance is through credit-life products, purchased alongside microloans. Clients purchasing such products may not consciously be opting to buy them – they may simply be bundled with the loan – and they may not even be truly aware that they have such insurance or what it means.
Agricultural insurance brings in a bit more complexity. Typically, this insurance focuses on a single crop, whereas smallholder farmers are more likely to grow a variety of produce and less likely to specialize unless they are confident that they can secure their food supply and produce a surplus that can be sold for cash. In a context where many millions of farmers are barely producing enough to survive, a reluctance to spend money insuring against a risk that may – or may not – happen at some point in the future is entirely understandable. The tragedy of this is that those who need it most, and whose existence is most precarious, may be least able to afford the premiums charged to transfer their risk.
From the supply side, multiple factors make pricing risk accurately for this segment very challenging, and as a result, insurance providers may charge premiums that are perceived by would-be clients as unaffordable, so that ultimately the market fails.
On a more positive note, index-linked agricultural schemes to cover crop failures, typically where these are due to natural disasters and adverse weather conditions, are often fully or partially subsidized by governments, and thus overcome some of these obstacles. However, such products represent less than 10% of what is currently available on the market.
Gateway: You talked about the "transformative role of insurance" by highlighting a new insurance model developed in partnership with the VisionFund, World Vision, Global Parametrics, ACRE Africa and the Syngenta Foundation. Can you describe this model and explain how it differs from previous ones?
Stewart: African farmers often need to specialize in a particular crop or livestock to come out of poverty, to become a "bean farmer" or a "dairy farmer". By specializing in one agricultural activity, farmers can increase income dramatically as they become more efficient and are able to scale their operations. But, specialization concentrates farmers' risk in a particular activity. Further, to specialize successfully the farmer needs to invest in order to obtain the best inputs and techniques. This concentration of risk and the need to increase investments poses a great challenge for farmers.
Insurance is transformational in this situation in that it achieves three things:
- First, it changes the farmer's risk vs. reward equation to encourage innovation.
- Second, it reduces the farmer's credit risk, enhancing the farmer's access to finance.
- Third, farmers can partner with financial service providers because the significant concentration of risk is covered by the insurance product.
Our model brings two innovative types of insurance: 1) A Group Multi Peril Crop Insurance (GMPCI) to cover more risks for farmers; and 2) a portfolio insurance for the finance providers to ensure that credit continues to be available even in drought conditions. The key difference between the new model and the previous ones, is simple: a partnership among farmers, financial institutions, and insurance providers. Farming, Finance, and Insurance at last being integrated for the benefit of small farmers.
We have this model working with 5,000 farmers in Tanzania and are looking to double this program next year. We have funded plans to roll out to a further 6 African countries in the next 3 years targeting 200,000 farmers.
Read the full interview here