Drought Index Insurance for Farmers in Africa  REMIX 

Drought Microinsurance for Farmers

Summary

            Africa is chronically food-insecure for good reasons.  Nearly all agriculture is rain-fed and depends on the arrival of seasonal rains for successful cultivation.  When a drought occurs, the coping ability of farmers is overwhelmed, which can result in a shortage of food.  Unfortunately, farmers in Africa are completely exposed to these climate risks and must bear the full brunt of climatic variability themselves.

Furthermore, many African nations are facing increasing uncertainty in their food supply due to the effects of climate change, a situation that will only worsen in future years if climate models behave as predicted.  By performing scientific and financial analysis on the changing climate, farmers can be encouraged to undertake less risky investments and a buffer may be built against the ravages of an unforeseen climate.

For example, a small loan before the growing season could provide farmers with better seeds and fertilizer, but they are often reluctant borrow money if they don't know whether they'll be able grow enough food to pay it back, and will resort to lower-cost farming methods that produce far less food.  If we could somehow smooth the income of farmers so that the good years help pay for the bad years, they would be more likely to invest in higher-quality inputs and produce more food.

Unfortunately, you can't really insure for crop damage in Africa, for obvious reasons.  It would be impossible to go out to every small family farm and check crops individually.  So we have to try and figure out indirectly how much food people are growing, and there are different ways to do that.  One method is to use a satellite to tell you how much vegetation is growing at various times of the year.  Another way is to measure rainfall so you know when there's a serious drought.  This is called "index" insurance because you set up an index that pays out a certain amount of money if the rainfall is measured to be below a certain amount.

The intention of weather index insurance is to smooth income to make the good years pay for the bad years, and is intended to be a business administered by African insurance companies without the use of subsidies.  In other words, all money paid out in insurance claims would have to be paid in as premiums at some point.  Weather index insurance is an opportunity to create a sustainable, risk-reducing business model for African farmers that would allow them to grow more food and face risks more confidently.  And as the threat of climate change threatens even more droughts in Sub-Saharan Africa, the time to help Africans deal with climate risks is now.

Required Resources

            All data necessary for the successful completion of a weather index insurance project is freely available online through the NOAA (National Oceanic and Atmospheric Association.)  Many years of satellite rainfall estimates exist from several sources, and these satellite estimates could be used to model the historical frequency of drought events, as well as the trends in rainfall distribution. 

            Although reliable crop production estimates in African countries are often difficult to obtain, there is a long history of crop models written by researchers to explain what happens to crops when faced by drought.  These models would provide insight into when payouts should have occurred for farmers on the ground.

            Of more immediate use would be contacts with different development organizations that would be necessary partners into an enterprise of this nature, such as insurance companies, lending organizations, agricultural specialists, as well as in-country government organizations and stakeholders.  

Business Case

            This project is designed to produce a viable financial product that would be able to stand on its own in the open market.  What is needed is the startup capital necessary to launch a weather index insurance project, and private businesses interested in their bottom line would carry the process forward.  That said, there are several key partnerships that must be made for a successful launch.

            First, an insurance company must agree to write the policies to cover the farmers.  They will be responsible for collecting the premiums from the farmers and distributing payouts, should they occur.  Likely, this company will also work with a global reinsurance company, which would assume a large portion of the risk.  If farmers in Africa were allowed to tap into global risk markets, an insurance company could potentially pool risk from different parts of the world.  In this way, the farmers' risk would be shared by the rest of the world, and they wouldn't have to face the consequences of a poor rainy season alone.

            Second, a microfinance agency, farmers' association, or local development organization that works in rural Africa would need to be engaged.  Often, banks and insurance companies are interested in talking to farmers at the village level, but are stymied by the relatively high cost of doing so compared to the financial gain of doing business with a subsistence farmer.  An organization that has a history of solid contacts on the ground would be absolutely essential.

            Third, the farmers in the site selected would need to be educated about the weather index insurance product and provide insight as to the conditions they face on the ground.  Involving farmers in the design of their own insurance product would result in greater understanding and ownership of the project.

Plan And Execution

There have been several previous attempts at implementing a weather index insurance scheme by academics and development organizations like the World Bank.  Usually, these schemes collapse under their own weight with unrealistic burdens of number of farmers insured and the pace at which they are expected to scale up.

Given the potential prize ($20,000), a modest intervention would be all that would be possible, on the scale of a single village.  Once the relationships are in place and the technology proven, a larger number of farmers would be eligible to participate and the geographic spread would increase.

One open question in my mind would be the best place within Africa to begin such a program.  I am very familiar with Malawi, having been a Peace Corps Volunteer there, but I'm not certain as to the availability of the partners described above, which would be essential.  In addition, all work of this nature would of course need to adhere to the tax and regulatory laws of any country chosen, and this will likely require some research.

Real World Impact

            The real impact of a project of this nature will only be felt after several years of its existence.  This is because it really works best for the years in which the rainfall was adequate.  In other words, if we can cover farmers for the bad years, they will be more productive in the good years.  By allowing them to build household assets, the can escape the situation known as a "poverty trap" in which they must consume their productive assets, like oxen that are needed to plow the fields or seeds needed to plant for the next year.  By building household assets and reducing exposure to risks, it may be possible to transition people out of poverty.

            In addition, this discussion happens under the specter of climate change, and by helping farmers to cope with the risks they currently face, it will be a head start towards helping them cope with the risks they will face in the future.

Thanks for reading!

Michael Norton

[email protected]

RPCV/Malawi 2002-04