DEMYSTIFYING AGRICULTURE INSURANCE
Climate change is currently one of the biggest risks that farmers in Africa face. Inconsistent weather in recent years has resulted to a decrease in agriculture production, an increase in poverty levels and a threat to food security. Agricultural risks not only affect farmers, the effects spill over to the entire agribusiness value chain. Previously, the President of Kenya had declared the drought in Kenya a national disaster with a call for international support. The drought starts in periods when rains fail and temperatures are unusually high. Risk mitigation strategies such as climate smart agriculture and agriculture insurance are some of the main ways through which farmers can address these risks.
Agriculture insurance is the protection which farmers buy from insurance companies for their crops and livestock. Farmers pay some amount of money (premium) to insurance companies to compensate them when they incur losses. The sum insured is agreed at the inception of the contract and may be based on production costs, or on the expected crop revenue. Farmers can also insure against risks such as drought, hail, frost damage, fire and lightning, and pests & diseases for livestock. The following products are currently available in the Kenyan market from insurance companies and agriculture insurance providers.
Types of Insurance Products
| Name | Description |
| Weather Index Insurance (WII) * An Index is a formula that correlates as accurately as possible the cropping season experiences for each crop phase and is used to calculate losses suffered. Factors used to develop an index include – crop type, region specification and historical data e.g. weather, yield, and risk occurrence. | This type of crop insurance monitors rainfall amount using weathers stations or satellites in a defined location thereby determining if there is crop failure due to lack of adequate or excess rainfall during the cropping season. |
| Multi-Peril Crop Insurance (MPCI) | Provides insurance against all perils that affect production unless specific perils have been explicitly excluded in the contract of insurance. Risks covered include uncontrollable pests and diseases, flooding, windstorm, frost, hailstorm, fire etc. |
| Area Yield Index Cover (AYI) | This cover protects farmers against yield shortfall modelled using data collected over a defined area. It covers against a wide range of risks such as uncontrollable pests and diseases, flooding, windstorm, frost, hailstorm, etc. that can cause significant yield deviation from a long term average of an area. |
| Hybrid Cover | This is a combination of the Weather Index Insurance (WII) and the traditional Multi-Peril Crop Insurance (MPCI). The benefit of combining the two products is that it enables farmers to take advantage of the relative strengths of each. The WII component provides a more objective way of assessing the impact of excess rainfall and drought on the crop and allows for the crop to be under an insurance cover from planting. The MPCI component allows other risks beyond weather to be covered (e.g. pests, diseases, floods, frost, hail damage, wind damage, etc.) |
| demnity Based Livestock Insurance | The traditional indemnity insurance is a contractual agreement in which one party guarantees compensation for actual or potential losses or damages sustained by another. In this case, compensation is paid by the insurance company should the animal die under the covered risks. |
| Index Based Livestock Insurance (IBLI) | This product that is designed to protect against prolonged forage scarcity. IBLI triggers payment to pastoralists to help maintain their livestock in the face of severe forage scarcity. IBLI is insurance for drought only. It is a contractual agreement to pay policy holders proportional to the severe forage scarcity experienced as a result drought. The availability of pasture is tracked from vegetation imagery by satellite. IBLI does not give insurance coverage for livestock asset lose due to other causes like predation, disease, raids etc. |
Benefits of Agriculture Insurance Agriculture insurance provides gives a farmer peace of mind in that if anything happens to their investment, they are sure of compensation from the insurance company. Insurance also allows farmers to de-risk their investment and purchase improved seeds and inputs which produce higher yields, leading to improved livelihoods. With insurance, farmers are able to access credit and repay their loans even if crop failure happens.
Agricultural risk management ultimately is a combination of technical and financial tools. Farmers can use several tools, whenever they are available, to deal with these multiple sources of agricultural risk. For instance, by choosing not to select a particular crop or crops which they consider of high risk for the area in which their farms are located. They may seek to lessen the risk through, for example, planting crops only in very favourable conditions or by investing in irrigation tools. Lastly, they may transfer all or part of the risks to a third party through an insurance contract as described in this article