REVIEW Index-based insurance for Climate-Smart Agriculture

Improving climate risk transfer and management for Climate-Smart Agriculture A review of existing examples of successful index-based insurance for scaling up

Review The review consists of a collection of case studies providing the basis for further exploring the function of index-based risk management tools towards the promotion of Climate- Smart Agriculture, through the adoption of tailored solutions by farming communities increasingly exposed to climate change related

©FAO/Simon Maina risks.

SECTIONS

1 Introduction

Case studies 2 Jimmy Adegoke, Pramod Aggarwal, Mark Rüegg, James Hansen, Daniela Cuellar, Rahel Diro, Conclusions Rebecca Shaw, Jon Hellin, Helen Greatrex, Robert 3 Zougmoré

Table of Contents

Introduction ...... 5 Case Study: India ...... 10 Case study: West Africa ...... 14 Case study: The R4 Rural Resilience Initiative (R4) ...... 18 Case Study: Agriculture and Climate Risk Enterprise (ACRE) Africa ...... 21 Case Study: United States (U.S.) ...... 25 Case Study: Nigeria ...... 30 Conclusions ...... 34 Lessons learned, key challenges and potential for scaling up ...... 34 References ...... 38

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LIST OF ACRONYMS

1. ACRE Agriculture and Climate Risk Enterprise 2. AFD Agricultural and Forestry Development 3. AGRA Alliance for a Green Revolution in Africa 4. AGRODIA Association de Grossites et Detaillants d’Intrants du Burkina Faso 5. AIC Agricultural Insurance Company of India 6. AIP Approved Insurance Providers 7. AMAB Assurance Mutuelle Agricole du Benin 8. APH Actual Production History 9. ARBY Area-based yield 10. ARH Actual Revenue History 11. ARP Area Revenue Protection 12. ARS Assurance Récolte Sahel 13. AYP Area Yield Protection 14. CAT Catastrophic Coverage 15. CCAFS Climate Change and Food Security 16. CGIAR Consultative Group for International Agricultural Research 17. CIRAD Centre de Coopération Internationale en Recherche Agronomique pour le Développement 18. CSA Climate-Smart Agriculture 19. CSV Climate-Smart Village 20. ECOWAS Economic Community of West African States 21. EU European Union 22. ET Evapotranspiration 23. FAO Food and Agricultural Organization of the United Nations 24. FCIC Federal Crop Insurance Corporation 25. FMARD Nigeria’s Federal Ministry of Agriculture and Rural Development 26. GACSA Global Alliance on Climate-Smart Agriculture 27. GHG Green House Gases 28. GIIF Global Index Insurance Facility 29. GIZ German Corporation for International Cooperation 30. GRIP Group Risk Income Protection 31. HARITA Horn of Africa Risk Transfer for Adaptation 32. IBRD International Bank for Reconstruction and Development 33. IFC International Finance Corporation 34. IFDC International Fertilizer Development Center 35. IFW Insurance for Work 36. ILO International Labour Organization 37. IPCC Intergovernmental Panel on Climate Change

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38. IRDA Insurance Regulatory and Development Authority of India 39. IRI International Research Institute for Climate and Society 40. MFIs Microfinance institutions 41. NAIC Nigerian Agricultural Insurance Corporation 42. NARF National Agricultural Resilience Framework 43. NDVI Normalized Difference Vegetation Index 44. NGOs Non-governmental organizations 45. NIA Nigerian Insurers’ Association 46. NIMET Nigerian Meteorological Agency 47. PG PlaNet Guarantee 48. PSNP Productive Safenet Program 49. REST Relief Society of Tigray 50. RMA Risk Management Agency 51. RNCPS Reseau National des Cooperatives des Producteurs de Semences d’Arachide du Senegal 52. RPG Replanting Guarantee 53. SSA Sub-Saharan Africa 54. SCO Supplemental Coverage Option 55. SNIID Social Network for Index Insurance Design 56. SRA Standard Reinsurance Agreement 57. UNCTAD United Nations Conference on Trade and Development 58. UNEP United Nations Environment Programme 59. USAID United States Agency for International Development 60. USDA United States Department of Agriculture 61. WBCIS Weather Based Insurance Index 62. WFP World Food Programme 63. WFRP Whole-Farm Revenue Protection 64. YP Yield Protection

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Introduction Climate-smart agriculture (CSA) has Overview of index based insurance recently gained prominence as a responsive tools application and rationale of the approach to these challenges. CSA is publication1 defined by three objectives: sustainably increasing agricultural productivity to support increased incomes, food security “In a world of plenty, no one, not a single and development; promoting adaptive person, should go hungry. But almost one capacity at multiple levels; and enabling billion still do not have enough to eat. I greenhouse gas (GHG) emission reductions want to see an end to hunger everywhere and increasing carbon sinks (FAO, 2013). within my lifetime.” Therefore, the concept of CSA combines climate change and food security through These were the words of Ban Ki-moon, the integration of adaptation and mitigation United Nations Secretary General, at the measures. As such, it aims to reduce Rio20+ Conference in Rio de Janeiro, Brazil vulnerability by improving the adaptive in 2012, where heads of states, principals capacity of agricultural systems to climate of major global development agencies, and stress, thus securing the provision of food, leaders from business and civil society met while reducing GHG emissions from to envision viable pathways for sustaining agricultural practices and land uses that the environmental well-being of the planet contribute to climate change (Scherr et al., as population grows toward a projected 2012; Campbell et al., 2014; Harvey et al., nine billion people by 2050. 2014). The case has been made that CSA’s overarching aim is to orient and “ground” The causes of hunger and global food the correct technical, policy and investment insecurity are numerous. Contributing conditions required for agriculture to factors include low agricultural productivity respond to climate change and future food of farmland in much of the developing demands (Ren, 2015). A key reason for the world; weak or under-developed emergence of the CSA model was the agricultural markets; inadequate extension recognition that agriculture, and related services; unsustainable farming practices; food security issues, require a holistic lack of access to capital and displacements approach that can be achieved through of populations from their homelands due to synergistic efforts that encompass climate persistent violence, conflict or insurgency. change mitigation and adaptation These situations constitute severe objectives within an integrated framework. challenges, many of which have been linked to climate change. Since 1980, As mentioned, a key component of CSA is climate change is estimated to have building adaptive capacity to enable various reduced global yields of maize and wheat actors along the agricultural production by 3.8 and 5.5% respectively (Lobell et al., value chain to respond effectively to 2011). Increased climate variability in the longer-term climate change and improve coming decades will increase the frequency their ability to manage the risks associated and severity of floods and droughts, with increased climate variability. Actions radically disrupting markets, increasing to build adaptive capacity are diverse. production risks, reducing coping capacities These include building ecosystem services and elevating threats to food access, that enhance resilience in agricultural especially for vulnerable and resource-poor systems; access to crop varieties that are communities (Bates et al., 2010; Thornton more tolerant to heat, drought, flood and and Gerber, 2010; FAO and EU, 2014). salinity; diversification of farm enterprises; and climate information services and information related to planting dates, pest 1 Contribution prepared by Professor Jimmy Adegoke, control, etc. (Campbell et al., 2014). University of Missouri-Kansas City (UMKC) and Bianca Dendena (FAO).

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Other actions may include enhancing social premiums in order for the insurance safety nets and adopting risk management company to account for the increased risk or risk transfer instruments such as index- of a payout. Index insurance largely based insurance, which is increasingly overcomes these problems. In this case, viewed as an important tool for allowing payout is determined by an objective smallholder farmers to better manage index, such as the amount of rain climate risk by enhancing their resilience. measured at a local weather station, or the health or vigor of vegetation as determined Index insurance differs from traditional through a satellite-derived index. There is indemnity insurance, where payouts are no need to verify losses through individual explicitly based on measured loss for a farm visits, which offers major cost saving specific client. Instead, in index insurance, from reduced administration costs. farmers can purchase coverage based on an index that is correlated with those In addition, index insurance is more losses, such as the amount of rain during a resistant to moral hazard and adverse certain time span (weather-based indices) selection, which again leads to lower or average yield losses over a larger region premiums. In this case, a payout does not (area yield indices). Payouts are then depend on the state of farmers’ fields, and triggered when this index falls above or so the farmers who benefit most are those below a pre-specified threshold. This who can keep their crops alive in an means that index insurance is not designed adverse year (Greatrex et al., 2015). to protect farmers against every peril, but Moreover, index insurance is usually is instead designed for situations where designed for a specific, clearly defined there is a larger scale, or regional risk (in hazard and it does not typically cover all the case of area yield insurance), or a well- the risks that a farmer might be exposed defined climate risk (in the case of to. The insurer is therefore covering less weather-based index insurance) that risk and is better able to quantify the significantly influences a farmer’s livelihood probabilities of payout. These savings (Greatrex et al., 2015). generally translate to less expensive premiums for the insured. It is precisely for Compared to its traditional indemnity these reasons that index-based insurance counterpart, index-based insurance has is being promoted as a valuable adaptive several advantages, especially for instrument and climate risk transfer smallholder farmers in developing mechanism for smallholder farmers through countries. In indemnity insurance, the increased access to the insurance market. contract payout is dependent on the crop outcome of a specific farm for which insurance was previously purchased. The farmer can only claim a payout if the crop fails, and this might serve as an incentive for the farmer to allow crops to fail. This is the so-called “moral hazard”. On a related note, adverse selection may occur when the demand for insurance is positively correlated with the risk of loss, thus higher risk clients will tend to buy more insurance. Both of these phenomena lead to increased

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Figure 1. Examples of Weather-Index Insurance Schemes based on data from the Global Index Insurance Facility (Source: World Bank Group).

2014). If pre- and post-process emissions As well as contributing to effectively are included, global food systems building adaptive capacities to face climate contribute between 19% and 29% of global change, index-based insurance can play a GHG emissions (Vermeulen et al., 2012). role in fostering the reduction of GHG The potential for GHG emission reductions emissions and increasing carbon sinks by from agriculture by 2030, considering both contributing to orient the intensification of reductions in GHG emissions and increases agroecosystems. In this sense, some in soil carbon sequestration, are estimated studies (e.g. Campbell et al., 2014) to be between 4,500 and 6,000 Mt suggest that when intensification is well CO2e/year (Branca et al., 2013; Smith et planned and properly incentivized, it is not al., 2008). only an essential means of adapting to climate change, but also results in lower Developing countries are particularly emissions per unit of output. The relevance vulnerable to climate change impacts of mitigation is acknowledged in the CSA because of weak institutional support approach, where the reduction of GHG is mechanisms and the high dependence on indeed the third leg of the tripod on which rainfed agriculture among their millions of CSA stands. This is not unexpected as smallholder farmers. In this framework, it agriculture is a significant sector in terms is generally acknowledged that Africa will of GHG emissions, and is therefore under be the continent hardest hit by climate pressure to mitigate climate change change, and with the weakest coping through GHG emission reductions. The capacity, while resources to manage 2014 Fifth Assessment Report by the disaster risk and adaptation to climate Intergovernmental Panel on Climate change are limited and segmented. The Change (IPCC) estimated that agriculture, recent guidebook on climate change forestry and other land use are responsible adaption in Africa produced by UNEP for around a quarter of current (2012) identified insurance and other ex anthropogenic GHG emissions (Smith et al., ante risk financing mechanisms as a critical

7 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE part of a comprehensive disaster risk the event of crop failure. Following the management strategy, having the potential success of this pilot scheme, Weather to play an important role in disaster risk Index Crop Insurance was extended to reduction and climate change adaptation in cover farmers across in Tanzania, Rwanda Africa. In addition, financial products need and Asia (India and the Philippines).The to be tied to efforts and incentives for Global Index Insurance Facility (GIIF)4, an investment in risk reduction. innovative program of the World Bank Group's Finance and Markets Global There are some, though still few, very good Practice, is an effective example of examples of the use of micro-insurance for initiatives spreading index insurance as a helping climate change vulnerable tool for ensuring resilience and self-reliance communities available in different parts of for small-scale food producers worldwide. Africa, as well as in other geographic GIIF is multi-donor trust fund supporting regions. In Africa specifically, where over the development and growth of local the last 30 years data from the markets for weather and disaster-related International Disaster Database show that index-based insurance in developing an estimated 1,000 natural disasters countries, primarily sub-Saharan Africa, occurred affecting 328 million people, the Latin America and the Caribbean, and Asia index-based program initially known as Pacific. GIIF's objective is to expand the HARITA (now known as the Rural Resilience use of index insurance as a risk Initiative R42) is helping farmers to get management tool in agriculture, food access to loans. Such loans are used to security and disaster risk reduction. To purchase farm inputs with the support of a date, GIIF’s implementing partners have national organization that provides covered more than 600,000 farmers, agricultural extension services, including pastoralists and micro-entrepreneurs with assistance in securing better market access $119 million in sums insured and reached for farmers. In addition, the World Bank, in over one million people with information collaboration with MicroEnsure as an about and access to index insurance. insurance intermediary, introduced one of Another related project is the Index Africa’s first Weather Index Crop Insurance Insurance Innovation Initiative (I4)5, jointly programs during the 2005-2006 growing implemented by the Feed the Future season as a pilot in Malawi3. This product Innovation Lab for Assets and Market provided protection against crop failure Access at UC Davis, the United States caused by drought or excess rain, and Agency for International Development enabled farmers to access credit used to (USAID), the Food and Agriculture purchase quality seeds and fertilizers in Organization of the United Nations (FAO), order to maximize output. By linking farms the Micro-Insurance Innovation Facility of to local weather stations and introducing an the International Labour Organization (ILO) automatic payout process, farmers were and Oxfam America. not required to file a claim or go through an expensive loss verification process in Such a research initiative is focused on designing and testing specific solutions to 2 For further details on the program, see the section issues characterizing earlier index referred to as The R4 Rural Resilience Initiative. insurance tools and facilitating the uptake 3 The partners involved in this project since of improved tools by at-risk communities. 2005 include the Insurance Association of Currently, there are a wide range of Malawi (IAM), Malawi Rural Finance Corporation (MRFC), Opportunity innovative solutions being tested related to International Bank of Malawi (OIBM), the different aspects of index-based insurance National Association of Small Farmers of products. Malawi (NASFAM), and in more recent years the Malawi Union of Savings and Credit Cooperatives (MUSSCO), Malawi Savings Bank (MSB), the contract farming companies Alliance One, 4 For a complete overview of GIIF projects by region, Limbe Leaf and Cheetah, the National Association of please refer to GIIF website. Small Farmers of Malawi (NASFAM), and the Malawi 5 For a complete overview of I4 program, please Meteorological Services Department (MMSD). refer to I4 website.

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In Guatemala, for instance, the research (NDVI) and measures of evapotranspiration focus is on understanding how index-based (ET) on which a low cost index system insurance products can improve risk more strongly correlating with crop yields management and risk coping for coffee could be built. cooperatives and their members, Through collaboration with Nyala Insurance particularly looking at the reasons why in Ethiopia, the I4 initiative is trying to index-based group insurance may be provide insurance through credit contracts, superior to index-based individual thus overcoming the approach of insurance in terms of uptake. addressing only a credit constraint or In northern Kenya, pastoralist and agro- insurance failures. The testing of insured pastoralist households vulnerable to credit targets local cooperatives that drought are involved in a project aimed to borrow in order to make in-kind loans of evaluate synergies between social fertilizer. In years in which an index development and social protection plans, insurance mechanism indicates a payout, with the latter consisting of an insurance loans will be repaid by the insurance to the program with payments based on remote cooperatives, with the ultimate goal of sensing indicators of forage scarcity and improving agricultural productivity and livestock mortality. incomes among Ethiopian smallholders. An ongoing experiment in Peru seeks to In Ethiopia and Bangladesh, there is test an area-based yield (ARBY) insurance another ongoing research project aimed at scheme for small and medium-sized developing simple, flexible and inclusive producers in selected valleys of the index insurance products to be placed in Peruvian coast by working in close the framework of network-based savings, collaboration with government officials, gifts and loans credit to insure some of the financial market providers, and the private basis risk inherent to these products. insurance sector. By assessing the uptake The research questions underlying the and impact of this pilot project, conclusions ongoing initiatives mentioned in the will be made to inform future activity of the overview above, which is far from being local Ministry of Agriculture. exhaustive, provide the basis for further The OSU/ACET project in Ghana is testing a exploring the function of index-based risk model of integrated climate risk transfer instruments in light of the urgent management strategies, focused on the challenges and issues posed by climate coupling of index insurance with production change. A major point in this sense is the loans that require any indemnity payment understanding of the opportunities for to first be applied to outstanding loans. using index-based insurance to promote According to the research hypothesis, this sustainable intensification within would reduce the impact of agricultural agricultural systems in ways that can help loan defaults on lenders during adverse achieve all three CSA objectives. natural events, thereby allowing lenders to This review will explore this central reduce the interest rates they charge on question and examine the extent to which agricultural production loans, thus weather index insurance complements the expanding access to credit among three CSA objectives. Some relevant case smallholders. studies are referred to by highlighting key In Tanzania, the focus of the research success factors and challenges that appear initiative is on reducing the basis risk to contribute to the outcomes of the associated with weather index insurance implementation of the index-based products by developing a satellite-based agricultural insurance programs reviewed. index that could increase the precision of The report also draws out lessons that using environmental and weather factors to should be considered as a basis for further estimate actual yields. The satellite-based building out these initiatives and/or scaling indicators currently being tested are the them up to other contexts and countries. Normalized Difference Vegetation Index

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6 distress through a faster and more Case Study: India transparent claim settlements process and removing moral hazard associated with crop cutting experiments are among the key Background objectives of WBCIS. The triggers are Since 1920, there have been several designed for specific crops and regions scattered pilot projects on crop insurance in based on crop-weather relationships. India. However, the first comprehensive Payments are made once the weather nation-wide crop insurance scheme was variable crosses the pre-established trigger launched only in 1985. It was based on the at the pre-agreed local reference weather area-yield approach and covered cereals, station. legumes and oilseeds, and was linked to agricultural credit borrowers. The indemnity and premiums were to a large extent paid Contribution to CSA by the government. A National Agricultural Smallholder farmers have limited capital Insurance Scheme was launched in 1999 to and often lack the resources to access to address the operational problems of the institutional credit. In the event of crop previous scheme. Today, nearly 30 million damage due to climatic stresses, weather- farmers are insured in India (Dept. of based crop insurance can assure farmers of Agriculture, 2014). some income, to mitigate their losses and Weather-index-based insurance began in build resilience. Payouts from the insurance 2003 when the ICICI-Lombard General scheme can prevent farmers from Insurance Company offered rainfall undertaking extreme coping measures such insurance to groundnut and castor farmers as migration, emergency disposal of assets in Andhra Pradesh. A national-level and so on. It can instil faith in farmers to Weather-Based Crop Insurance Scheme continue farming and investing in inputs (WBCIS) was launched in 2007. Under this even in the face of climatic stresses. In scheme, claim payments to farmers are an addition, insurance in India is linked to farm explicit function of specific triggers related loans and therefore it increases access to to thresholds of rainfall, temperature or credit for resource poor farmers. This humidity as recorded at a local reference income presumably goes towards improved weather station. The scheme also works on technologies but there is no direct evidence an area approach. The introduction of that insurance triggers investment in WBCIS gave stakeholders an option of climate-smart agriculture practices and rainfall/temperature index in additional to technologies. At present, crop insurance yield index of previous schemes. Almost 14 programmes have no link with the adoption million farmers have their crops insured by of any climate-smart agriculture practices weather index-based schemes, which is and technologies. largest in the world (Dept. of Agriculture, 2014). Characteristics and Design Methodology of Weather Index Objectives and approach Insurance Climatic variability has been a major source India has been experimenting with a for widespread agrarian distress in India. number of crop insurance schemes for at The key objective of WBCIS is to provide least four decades. Area-yield index farmers an objective, transparent scheme insurance schemes were introduced on a that offers them a safety net in the event of large-scale in 1985. To reduce the climatic extremes. Reducing agrarian anomalies and moral hazard in such schemes, a weather-based pilot was

6 Contribution prepared by Dr Pramod Aggarwal, introduced in 2003 as rainfall insurance. Regional Program Leader of the CGIAR Research Based on this experience, a national level Program on Climate Change, Agriculture and Food weather-based crop insurance scheme Security.

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(WBCIS) was started in 2007 where the The amount of insurance protection (the claim payment is a direct function of sum insured) is broadly based on the cost weather parameters such as rainfall, dry of inputs expected to be incurred by the spell, high temperature, frost, or humidity. insured in raising the crop. The sum insured Several alternative products have been is notified per unit area at the beginning of tried in India, like season rainfall index, every crop season in consultation with weighted rainfall index, multiple phase experts. It is different for various crops and weather index, consecutive dry day index, could also vary by region. The total sum excess/untimely rainfall index, low insured is further divided to various growth temperature and frost indices, high phases and critical weather indices temperature indices and indices for pest depending upon their importance. These and diseases. Today’s WBCIS products are are determined by agronomists and others typically a combination of these based on based on their judgement and experience. crop and region. The most common rainfall For the rainfed crops during the monsoon indices have crop sensitivity in different season such as rice, millets, soybean, phenological phases. cotton, pigeon pea and peanut, most insurance schemes have a crop growth Insurance is provided for crops grown in the stage specific scheme. In winter crops such monsoon season as well as in the post- as wheat, chickpea and mustard the growth monsoon season. Most cereals, pulses, stage specific or calendar month specific oilseeds and serval annual horticultural indices of high temperature as well as frost crops are covered under this scheme. The days are generally used in insurance scheme operates on the principle of “Area schemes. In crops such as potato, Approach” in selected notified Reference insurance schemes are also available for Unit Areas linked to a notified reference pests and diseases such as late blight, weather station. The risk coverage is which use proxies of temperature, rainfall generally from sowing to crop maturity but and humidity as triggers. could vary with individual crops and Reference Unit Area. Despite such details, there is still considerable basis risk in all crops leading Adverse weather incidents, if any, during to farmers’ dissatisfaction (Biswas and the crop season entitle the insured farmer a Tortajada, 2015). As a consequence there is payout, subject to the weather triggers a fair chance of an insured farmer getting defined in the ‘Payout Structure’ and the compensation when he or she may actually terms and conditions of the scheme. All not have suffered a loss. Also, the contrary farmers (including sharecroppers and case of not being compensated when they tenant cultivators) in the notified area are have suffered heavy losses may occur. An treated on par with regard to insurance. additional reason for these is the spatial The scheme is mandatory for cultivators distribution of risk, which is not well availing institutional credit for agriculture, captured due to the limited density of and voluntary for everyone else. weather stations. Lately a variety of Various states have tried to implement both statistical tools and crop growth models area-yield index as well as WBCIS have been used by the industry to better simultaneously. Both schemes enjoy characterise key weather indices, the substantial government subsidy: only the critical crop growth phases, and their insured cultivator pays only a part of the relative importance in yield loss estimation. total premium, and the balance is borne by More recently, a farmer satisfaction index the government. Unlike area-yield index was developed to develop appropriate schemes, WBCIS allows participation of rainfall/dry spell triggers based on an private sector insurance companies. For a innovative methodology using historical given district, governments generally crop weather and yield data, statistical choose one specific insurance company models, few crop growth models and based on open competition between optimisation techniques. companies.

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The premium rates are calculated based on WBCIS. In each district, only one company expected losses calculated using historical is assigned to run the scheme. weather data of the last 30 to 100 years depending upon availability. Thus, the premium rate could vary with each region Other relevant actors involved and with each crop. For most food crops Besides farmers, insurers and the premium rates to be paid by the insured are government (Dept. of Agriculture and capped at 1.5-2.0 % and the balance is Insurance Regulatory and Development paid by the government. Authority of India, IRDA) as regulatory bodies, other institutions like banks, research institutes like state agriculture Distribution and Organization universities and CGIAR centres are among Mechanism the major actors involved in this sector. All farmers in the notified areas can avail Research institutes, farmers and experts the WBCIS scheme. In addition, farmers play an important role in designing WBCIS availing crop loans from any financial term sheets. The India Meteorology institution including cooperative / Department, and lately several private commercial / regional and rural banks are companies, provide the reference weather automatically covered under the insurance data as well as the historical data. State scheme. All other farmers who wish to avail government officials, banks and sometimes insurance coverage can enrol by registering insurance companies conduct awareness for the scheme at the nearest bank branch campaigns for farmers. before the start of the crop specific risk period, if they have a bank account, and pay the requisite premium. These financial Program Impact and Outcomes institutions are responsible for distributing The weather index insurance in India is the any payouts from the insurer to the world’s largest weather-based crop insured. insurance scheme. Over the last decade, it The Agricultural Insurance Company of has established its position in the crop India (AIC) has been the traditional insurance market through transforming administrator of the government crop itself from small scattered pilots to a large- insurance programs. Lately, private scale program covering more than 14 insurance companies are also allowed to million farmers. participate in the scheme. Today, there are several insurance companies offering

Figure 2. Number of farmers insured and benefited by WBCIS in India from Kharif-2007 to Kharif- 2013 (Source: Anon, 2014).

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This was partially achieved by making and The amount in claims was less than the subsidising the premiums to the tune of 50 premium amount in all seasons except for to 70 %. Currently, WBCIS is being Rabi-2012. For the entire period, the claim implemented in 18 states, with the highest ratio was 0.7 and loss cost was 7%. Both coverage in Rajasthan. Figure 2 shows the (claim ration and loss cost) are significantly exponential pattern of the growth of WBCIS lower than other insurance schemes being in India. operated in India. This certainly indicates better financial viability. A question, Over a period of six and half years, WBCIS though, arises on the high basis risks, has insured, on an average, 4.3 million which is leading to no or less payment farmers per season leading to 5.9 million despite significant crop losses. This hectares of land coverage per season. The certainly indicates better financial viability. financial indicators like sum insured, gross A question, though, arises on the high basis premium and claims are presented in Figure risks, which is leading to no or less 3. payment despite significant crop losses.

Figure 3. Sum insured, gross premium and claims made under WBCIS in India from Kharif-2007 to Kharif- 2013 (Source: Dept. of Agriculture, 2014).

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7,8 ARS target population consists of farmers Case study: West Africa who are vulnerable to climate variations. They often live close to the poverty line, and their revenue mainly depends on Background agriculture. Therefore, a bad harvest due Assurance Récolte Sahel (ARS): A climate to adverse weather can put at risk their insurance project rolled out and coordinated livelihood, and push the farmers and their by PlaNet Guarantee (PG) in West Africa families into a poverty cycle. Consequently, banks and microfinance institutions (MFIs) The ARS project started in 2011 in Mali and consider them as risk-prone clients. By Burkina Faso and has since then been rolled subscribing to crop index insurance, out in 4 countries. In 2012, the initiative vulnerable farmers can secure their access started in Senegal and in 2013 in Benin. All to credit. projects are still ongoing. After the Constraints in regions where PG operates conduction of a feasibility study in 2013, a include the general lack of awareness and dry run pilot is currently being implemented understanding of insurance functioning, a in Ivory Coast for maize. Between 2011 weak level of agricultural financing by and 2014, 52,228 farmers subscribed to the financial institutions and the remoteness of weather index insurance initiative. rural populations.

Figure 4. ARS Areas of Operation in West Africa.

7 The main source for this document is a presentation provided by Planet Guarantee (PG) as well as contributions from PG team members. 8 Contribution prepared by Mark Rüegg, CEO and Founder of Celsius Pro.

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Objectives and Approach Characteristics and Design Methodology of Weather Index The overall objective of the programme is Insurance to enable access of farmers to financial tools in order to reduce the fluctuation in PlaNet Guarantee and its partners have agricultural income and facilitate the developed four indices using various financing mechanism for agriculture. methodologies: By protecting the portfolio of the banks and . Relative evapotranspiration MFIs, insurance secures the access to credit . Rainfall estimate and supports the development of the . Area yield agricultural sector. By improving access to . Weather stations credit and by securing the financial sector, the project aims to contribute to the overall The relative evapotranspiration index is growth of the agricultural sector. used for maize, sesame, and multi-cereals insurance products; the rainfall index is used for maize, groundnut, millet and rain Contribution to CSA fed rice insurance products and the yield PG’s crop index insurance contributes to index is used for cotton insurance product. climate-smart agriculture as it builds The climate products cover drought/rainfall resilience of farmers to climate change by deficit. All climate-based products are protecting their revenues from climate designed for multiple risk periods including variations. In addition, by improving their coverage for sowing failure and a dedicated access to credit, it gives them an coverage for each of the three phases of opportunity to increase their productivity crop development. Triggers, exits and the via the purchase of high-quality agricultural duration of each phase are determined inputs. according to the historical climatic data A study was conducted in Burkina Faso on crosschecked with best crop practices. the relationship between maize index The yield-based product comprises two insurance and the agricultural performance triggers, the first one applying to the of the farmers (Koloma, 2015). By insured production area and a second one comparing subscribers to ARS crop applying to the neighbouring area. insurance and non-subscribers, the results The first step in the methodology to of the study showed that the first group develop crop indices is to conduct an on- was more likely to invest in agricultural the-field survey to understand crop inputs compared to the latter. In both practices and demand of beneficiaries, their villages where the study was conducted, socio-economic conditions, ability and the number of fertilizer bags used per willingness to pay for insurance. Focus hectare appears to be twice as high for the group with potential clients are organized, insured population. Insured farmers also during which they are able to share about increase the planted surface. This also the risks they are facing, and their level of means the insured group is more prone to concern. taking risks compared to the non-insured Index experts in close collaboration with group. Moreover, this study also shows an international research organizations increase in access to credit for PlaNet (CIRAD, EARS, IRI) developed indices on Guarantee’s clients. The research shows the basis of historical data. that the sample of the insured population of Once designed, product presentation the two villages studied in Burkina Faso was workshops were organized with all able to mobilize a larger credit amount (1.4 stakeholders. Crop index insurance times more) compared to the non-insured solutions were typically launched in the sample. form of a pilot programme, which enabled modifications of the product’s features if needed. This participative methodology

ensures relevance and suitability of the product to fit the farmers’ demand.

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Every year the products are improved with Aggregator Approach: The aggregator the help of field visits, focus groups and strategy targets larger clients, in the hope weather data analysis conducted by the of collecting greater premium amounts. This index expert in order to compare the results option is the most relevant option to of the index with the farmers’ feedback and financially break-even whilst maintaining the rainfall data. the social mission of the organization. PlaNet Guarantee can provide added value Distribution and Organization to the aggregators and has accordingly Mechanism developed a commercial pitch for each type of aggregator as illustrated in the graph Distribution is currently done before the below. rain season via farmer cooperatives, MFIs, inputs dealers and NGOs. Going forward however, the distribution strategy outlined Commercial Pitch for Aggregators below is planned:

In terms of marketing, weather index Micro-Insurance Approach: A few insurance was barely known in the West strategic elements are crucial for a better African countries and demand had to be distribution in the coming seasons: created. The project started with awareness . Develop the bundled distribution creation by Planet Guarantee. Awareness and portfolios coverage models; campaigns and trainings were conducted . Extend the mobile subscription with farmers, distributors, local insurers, system; regulators and governments. . Modify the underwriting cycle by Marketing activities were conducted on four organizing post-harvest levels: a) Train the trainers, b) Train key distribution; contacts among farmers, c) Direct . Distribute index-based products awareness raising and d) Mass promotion. that are not connected with a A broad set of marketing instruments was specific cultivated crop in Burkina applied, ranging from marketing shows to Faso and Mali,; focus groups in villages. . Develop a model for premium

payment tailored to the farmers’

financial constraints.

Figure 5. Synopsis of the advantages provided by weather based index insurance products.

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Figure 6. Results for the ARS scheme.

Other relevant actors involved The schemes work with a number of unique regional platform for the design and partners in the individual countries. The delivery of inclusive social insurance main distribution partners are the following: solutions. . Benin: FECECAM (MFI) . Senegal: CCPA and RNCPS (rural PlaNet Guarantee has been developing cooperatives of Groundnut producers). agricultural insurance in West Africa since FEPROMAS (Rural cooperative of maize 2009, starting from scratch with no existing producers). Several networks of Millets index based insurance product in the and rain-fed rice producers. market. The last few years have been very . Burkina-Faso: Union Nationale des promising and have resulted in a strong set Producteurs de Cotton / Sofitex / of accomplishments. First, PlaNet Ecobank, Ecobank Burkina Faso, Réseau Guarantee has secured the regulatory des Caisses Populaires du Burkina framework, trained several crop insurance (RCPB Leading MFI with almost 80% of officers, increased the awareness of farmers market), AGRODIA (network of inputs on insurance, developed several products, suppliers) and several MFIs. opened 5 offices including a hub of crop . Mali: SORO YIRIWASO (MFI), insurance expertise in Dakar and involved COPROCUMA, Siguiniesigui, COPAM, important distribution channels including (rural cooperatives of maize and microfinance institutions, agribusinesses sesame farmers) and PROSEMA and farmer organizations. Moreover, PlaNet (agribusiness dedicated to sesame Guarantee has secured a network of promotion and transformation). insurers and reinsurers, international . The main insurers and reinsurers are: donors and technical partners. . Insurers: Allianz Mali, Allianz Burkina- Payouts were disbursed in 2012 in Mali and Faso, CNAAS Senegal, AMAB Benin. Burkina Faso, while in 2013 and 2014 there . Reinsurers: Swiss RE, Hannover Re, were payouts in all involved countries. Sen Re, Africa RE, CICA RE. Once the index triggers, PlaNet Guarantee . The main international organizations manages the process and the delegation and technical partners: from the insurer to distribution channel to . AFD, GIIF, USAID Feed the Future, execute the payout. PG calculates the AGRA, World Bank Group. financial flows between the insurer and the . CIRAD, IRI, I4, Oxfam, WFP, Positive distribution channel and is responsible for Planet, IFDC. all information transfer between both partners. Program Impact and Outcomes Since the beginning of the initiative, there The ARS initiative on agricultural index were no complaints registered from insured insurance is the first of its kind in farmers or any significant basis risk francophone West Africa and is an situation noted regarding the ARS opportunity to build an innovative and products.

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Case study: The R4 Rural asset base and an ability to pay back a loan 9 in a drought year, thus improving access to Resilience Initiative (R4) credit to allow investment in productive assets such as seeds, fertilizers and new technologies. Background The R4 initiative was initially called the The R4 Rural Resilience Initiative (R4), Horn of Africa Risk Transfer for Adaptation established in 2011, is a strategic (HARITA) project, developed in Ethiopia partnership between the UN World Food 2009 as a partnership between Oxfam Programme (WFP) and Oxfam America. Its America, the Relief Society of Tigray aim is to improve the resilience and food (REST), Ethiopian farmers, and several security of vulnerable rural households in other national and global partners. HARITA the face of increasing climate risks. In transitioned into the R4 Initiative in 2011, particular, the R4 initiative is deliberately and expanded its partnerships to include targeted at poor smallholder farmers who the World Food Programme, with the aim of were previously considered to be adapting lessons learnt in Ethiopia to other uninsurable due to a combination of countries. The program has scaled solidly, poverty, lack of education, data limitations from 200 Ethiopian farmers in the original and remoteness. 2009 HARITA pilot in Tigray, to over 43,000 R4 refers to the four integrated risk farmers (about 200,000 people) in Ethiopia, management strategies implemented by the Senegal, Malawi, Zambia and Kenya. program. The first is Risk Reduction. This is Between 2015 and 2016, about US$ the access to improved climate risk 450,000 in pay-outs were distributed management, for example natural resource through the initiative in Ethiopia, Senegal rehabilitation or new agricultural extension and Malawi. The insurance component is techniques. It is designed so that a notable for reaching a relatively large 29% drought year might have less of an impact of the population on average, and up to on farmers. Second, Risk Reserves involves 38% in some villages (Madajewicz et al., access to individual or group savings, so 2013). It is also notable for the fact that a that farmers can build a financial base for large proportion of the scaling happened in investing in their livelihoods. Savings can 2011 after a relatively wet year with very also provide a buffer for short-term needs, few payouts. increasing a household’s ability to cope with shocks. Group savings can be lend to Objectives and Approach individual participants with particular needs, Its approach has combined strong and providing a self-insurance mechanism for inclusive participatory processes, with the community, or targeted at particular strong institutional partnerships and groups such as savings for women in scientific support. This has enabled it to Oxfam’s Savings For Change program. reach highly vulnerable smallholder Index-based insurance falls under the third populations with index insurance, as one strategy, Risk Transfer, and aims to integral component of a diversified risk transfer the component of risk (e.g., a management strategy. major regional drought) that cannot be reduced in any other way. Finally, Prudent Characteristics and Design Risk Taking involves access to micro-credit. Methodology of Weather Index MFIs are often reluctant to offer credit to Insurance farmers because of the perceived high risk of default in bad seasons. The other R4 Social Network for Index Insurance Design strategies allow farmers to have a stronger (SNIID) is a participatory approach to design a product that integrates local

9 Contribution prepared by Dr James Hansen, Senior farmers’ and experts’ knowledge and Research Scientist at the International Research expertise. A “design team” composed of Institute for Climate and Society (IRI) and Daniela community leaders and representatives, Cuellar, Resilience and Social Protection Programme was established in each village and is Officer at World Food Programme (WFP).

18 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE regularly consulted. Aspects of the SNIID Government of Ethiopia’s Productive Safety process include discussions about exactly Net Program (PSNP). In other countries, it what needs insuring and when, plus is built into WFP Food For Assets initiatives. experimental economic risk simulations In 2014, an option of paying for insurance (‘games’) with the farmers to understand through a combination of cash and labor their preferences for key parts of the was introduced to give farmers the insurance contract, such as coverage and opportunity to graduate from the IFW frequency of payouts. Alongside these programs. In addition to providing a means information-gathering sessions, the R4 of insuring the poorest households without Initiative organizes financial education resorting to direct premium subsidy, the trainings and educational activities. This approach is also designed to complement allows time to work with farmers on topics other R4-strategies. For example, the IFW such as basis risk communication and programs employ farmers in community community-based basis-risk strategies. In drought risk reduction activities identified all of those activities, care was taken to through local participatory planning understand gender dynamics and to ensure processes. Education about these activities inclusion of appropriate gender strategies in was rated as one of the most important risk reduction activities. aspects of R4 in a recent impact review (Madajewicz et al., 2013). Experimental research games were also played to ensure that the product properly reflected the farmers’ wishes (Norton et al., Distribution and Organization 2014). During this research, game Mechanism participants exhibited clear preferences for insurance contracts with higher frequency The project has a well-defined plan for payouts and for insurance over other risk scaling in each new country. The first year management options, including high is known as a ‘dry run’ in which farmers interest savings. The preference for higher and local experts are consulted, an initial frequency payouts was mirrored in index design is completed, economic commercial sales of the product, with research games are played, and intensive commercial purchasers paying substantially capacity development is completed at a higher premiums than the minimal, low farmer and an institutional level. This is frequency option available. This combined followed by the second year. Here, there is evidence challenges claims that the very a rollout of the program for several poor universally choose minimal index thousand farmers, plus further refinement insurance coverage and supports concerns and scaling in future years. The dry-run that demand may outpace supply of strategy has allowed the project to test responsible insurance products. insurance products in a controlled environment and learn farmer preferences Because ground-based weather stations are between product options, prior to offering extremely sparse in the R4 project area, them through commercial outlets. several data-sources were used in index design and validation. The R4 index is Other relevant actors involved based on ARC2 satellite rainfall estimates, which were validated and back-stopped by The R4 initiative attributes its relative a combination of other satellite rainfall and success in part to the strength of its vegetation estimates, water-balance institutional partnerships. The project has satisfaction indices, rainfall simulators and directly engaged organizations at all stages statistical tools that interpolate data from of the insurance process, including farmer stations nearby (Stanimirova et al., 2013). groups, governments, banks, MFIs, local insurers, research institutions and To overcome the liquidity constraint, poor international reinsurers. This has helped to farmers have the option of paying build trust and develop an institutional premiums either in cash or through landscape that enabled insurance to insurance-for-work (IFW) programs. In sustainably scale. Ethiopia, the IFW scheme is built into the

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Program Impact and Outcomes On average, across all districts, insured farmers increased the amount of savings by an average of 123% compared to uninsured. The insured farmers tripled their savings from an average amount of 465 birr in 2009. The insured farmers also increased the number of oxen they own by 25% since 2009. Some benefits varied among the three districts evaluated. In one district, insured farmers increased their levels of grain reserves more than uninsured farmers. In a second district, insured farmers increased the number of oxen owned relative to the uninsured. The number of oxen declined slightly among the uninsured. In a third district, insured farmers increased the number of loans and amounts borrowed relative to the uninsured. The evidence showed that the program benefitted vulnerable groups and particularly women farmers. For example, relative to participating male-headed households, female-headed households increased their investments at a higher rate, took out more loans, decreased the amount of land that they sharecropped, increased their investments in hired labor, and increased their total planted land in response to insurance (Madajewicz et al., 2013).

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Case Study: Agriculture and Climate Risk Enterprise (ACRE) 10 Africa

Background This has led to heighted interest in About 97 % of staple production in Sub- agricultural insurance as a means to reduce Saharan Africa (SSA) is rainfed (FAO, vulnerability to weather shocks in the face 2011). This means millions of SSAs of increasing climate change. inhabitants who depend on agriculture for Consequently, agricultural insurance pilots employment and food supply are inherently have flourished in SSA each following its exposed to the vagaries of weather. There own unique approaches (Tadesse, 2015). is plenty of evidence showing that Kilimo Salama – which means “safe empowering farming households to better farming” in Swahili - is one of the most deal with weather shocks have far reaching successful agricultural insurance pilots. implications not only in improving their welfare in the short term but also for long term economic growth (Hill, 2010).

Figure 7. ACRE Africa Business model (Source: ACRE Africa https://acreafrica.com/services).

10 Contribution prepared by Rahel Diro, Research Staff Associate at International Research Institute for Climate and Society (IRI).

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Kilimo Salama was launched by the increasingly uncertain in many parts of Syngenta Foundation for Sustainable Africa. Such interannual variability is Agriculture, UAP Insurance and Safaricom expected to increase with climate change in 2009 in Kenya. With investments from (Feng, 2013). This has practical the Syngenta Foundation, the Global Index implications in agricultural production. A Insurance Facility (GIIF) and other funders, long dry spell after planting prevents the the initiative later evolved to establish seeds from germinating. This would mean Agriculture and Climate Risk Enterprise Ltd. farmers would have to buy new seeds and (ACRE). ACRE Africa, which is a brand replant if they are to seize rainfall name of ACRE Ltd., operates as an opportunities later in the season, which in insurance intermediary that provides itself is uncertain. Such loss is especially a insurance services to agricultural big setback for smallholder farmers who communities by working with local insurers often have little to spend on inputs. ACRE and players in the agriculture value chain. Africa is mitigating this exact challenge by It is involved in risk analysis, product offering a replanting guarantee cover. This development and monitoring (ACRE Africa, has significant contributions to climate 2016). It develops insurance products that smart agriculture by ensuring quick loss are customized to the specific needs of recovery and long term productivity of farmers. The biggest breakthrough in ACRE farmers. Africa’s model is its ability to capitalize on There is strong evidence suggesting that existing relationships. It partners with insurance plays an important role making farmer aggregators to provide insurance credit more accessible and affordable to cover bundled with other services. borrowers that are “rationed out” from credit markets due to their exposure to risk (Boucher et al., 2008). ACRE Africa Objectives and approach provides its clients with access to ACRE Africa is a company that aims to agricultural inputs by bundling insurance unlock agricultural productivity by offering and input loans. In addition, it offers localized solutions to mitigate climate risks. insurance to out grower agribusinesses to It brands itself as a company that is protect against the exposure of contract focused on covering production risks that farmers to weather shocks. Studies show affect wider portfolio of farmers. It offers a that contract farming is an integral part of menu of protection covering risks such as agricultural development as it affords drought, storm, floods for crops and predictable income to farmers and disease and accidental death for livestock. promotes access to markets (UNCTAD, One of the biggest barriers to developing 2009). insurance products for smallholder farmers Livestock is another important income is the huge distribution costs albeit the generating resource for a smallholder small value of individual transactions. ACRE farmer. Not only it serves as a source of Africa was able to overcome this challenge protein for the household, it’s also an through its innovative approach of working immediate source of cash be it through sell with farm aggregators (input providers, of livestock products, like milk or the lending institutions, cooperatives and out- animal itself. Cognizant of its importance to growers) and mobile network operators. livelihood, ACRE Africa provides dairy Bundling the insurance with other services insurance cover to manage loss due to such as inputs or loans makes it attractive accidental death of livestock that’s beyond to farmers while mobile transactions ensure the control of the owner. The product instantaneous premium collection and claim comes with animal care package requiring settlement. proper vaccinations and animal husbandry Contribution to CSA practices. These type of tailored agricultural insurance products are Onset and cessation of rainfall during the essential to build household assets and agricultural season have become improve their resilience to climatic shocks.

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Characteristics and Design hybrid index and multi-peril crop insurance Methodology of Weather Index cover (Ribeiro, 2017). The way the hybrid Insurance product works is by complementing the weather index trigger with a loss The ‘Replanting Guarantee’ (RPG) is ACRE adjustment after a field assessment. Africa’s signature agricultural insurance Although this type of hybrid product product. This innovative approach provides provides immediate solution for a farmers with access to a RPG cover by comprehensive cover, it offsets the benefits placing a scratch-off voucher found in the of weather index insurance through bag of the seed that they purchase. additional field visit costs. The long term Interested farmers then register their strategy may be to invest in technological location and planting date through SMS by innovations that would address basis risk using the code in the card. This initiates the concerns without inflating costs. insurance contract for their specific location. Upon registry, a text message will be sent to the farmer notifying her/him of Distribution and Organisation the policy number and value of the sum Mechanism insured (IFC, 2011). The premium is partly absorbed by the seed company. From the ACRE Africa employs different distribution seed company’s perspective, bundling the channels for its products. The RPG product insurance with a bag of seed is not only a first used input dealers to sell the RPG product differentiation strategy but also a cover bundled with a bag of seed. The means to build customer loyalty (Ribeiro, input dealers would get a commission of 2017). the profits. On top of that, ACRE Africa partnered with Safaricom, the largest In the event of germination failure caused mobile network operator in Kenya, to by a drought, registered farmers will register farmers and locate their farms. The receive a payout as a mobile money program also made use of Safaricom’s M- transfer or a replacement seed. This allows PESA, a popular mobile payment system, farmers to immediately replant and take for executing premium collections and advantage of the rainfall later in the payout settlement. This combination of season. Payout is calculated by comparing partners made it possible to launch and actual rainfall over a 21-day period during sustain a successful product. the planting with a pre-agreed upon “trigger” level. The “trigger” - which is Loan providers are other distributors with a considered to be the minimal rainfall level vested interested in insurance. Working needed for normal planting and with credit service providers, ACRE Africa germination - is set based on historical provides insurance for covering agricultural rainfall for the specified location based on input loan of farmers. This arrangement data from Meteorological Departments, provides farmers with much needed credit ACRE Africa’s automatic weather stations or for purchasing agricultural inputs by using satellite rainfall estimates. The increasing their creditworthiness while payout amount will depend on how much minimizing defaults for the loan company. the actual rainfall deviated from the trigger By 2016, 76% of ACRE’s farmers received level (Greatrex et al., 2015). insurance linked loans (IFC, 2016). Dairy cooperatives are also important partners As each contract targets a specific weather for distributing dairy livestock insurance for related loss, weather index insurance by farmers dealing with high yielding cows. design is exposed to some degree of basis risk. For instance, a drought index insurance contract will not cover a loss that Other relevant actors involved is caused by a pest infestation or disease. In fact, this is exactly what happened in Active involvement of financial institution is 2013 in Kenya where the maize crop failed critical for a successful insurance program. because of disease. In response to this ACRE Africa partners with local financial challenge, ACRE Africa started offering a institutions in the countries it operates as

23 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE well as with global reinsurance companies. While working directly with farm It works with over 10 financial institutions. aggregators enables easy provision of UAP Insurance in Kenya is the main insurance by slashing distribution costs, it insurance partner, as well as CIC Insurance is possible that farmers are unaware of the Group, APA, and UAP in Tanzania and coverage details. In the absence of SORAS in Rwanda among others. Swiss Re financial education and training – and Africa Re are among the re-insurance particularly in the context of SSA where company it partners with. Government is literacy levels are low - ACRE Africa’s another important actor in the insurance strength of working with aggregators could business. Regulatory agencies play a become its weakest link. As such, financial central role in ensuring agricultural education and training should become part insurance products meet the financial of its strategy as it scales to reach many regulatory framework of the country. more farmers. Furthermore, while insuring the loan portfolio of a lending institution

protects against mass defaults caused after Program Impact and Outcomes weather shock, it may undermine farmer ACRE Africa is by far the largest and fastest level “entrepreneurial” risk-taking if the growing microinsurance schemes in Africa. payouts do not directly or indirectly trickle Started 2009 as a pilot, it has reached 1.2 down to farmers. million clients by 2016 distributed across Kenya, Tanzania and Rwanda (IFC, 2016).

Its goal is to reach 10 countries covering 3 million farmers by 2018. To date, the sum insured has reached $56 Million across the three countries, while average premiums stand at $100 (ACRE Africa, 2016). It has had real success in bringing about meaningful change in farmers lives. An impact evaluation indicates that insured farmer invested 19% more in their farms, and earned 16% more than uninsured farmers in 2016 (IFC, 2016; ACRE Africa, 2016). ACRE Africa’s success with its signature RPG product is partly attributed to the 50% premium subsidy offered to farmers (Tadesse, 2015). The subsidized offer is to a ‘free sample’ that is designed to eventually lure clients into buying full season coverage, which will ensure the operational sustainability. Despite the attractive offer, however, there was low registration for insurance (IFC, 2016; Ribeiro, 2017). Studies have shown clients are more likely to buy insurance when they trust the provider (Cohen and Sebstad, 2006; Dercon et al., 2008). Clients are also less likely to buy insurance if they don’t understand the product they are being offered (Gaurav et al., 2011; Dercon et al., 2014). The low take-up rate could imply trust and product awareness may be lacking.

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Case Study: United States11 covered 294 million acres (~ 83% of the total crop acres) under 1.2 million policies with $110 billion in loss coverage (total Background liability). Major crops are covered in most counties where they are grown. Four The U.S. federal crop insurance program crops—corn, cotton, soybeans, and wheat— began in 1938 when Congress authorized typically account for more than 70% of the Federal Crop Insurance Corporation total acres enrolled in crop insurance. In (FCIC). The current program, which is 2014, the federal crop insurance covered administered by the U.S. Department of the following proportion of acreage of each Agriculture’s Risk Management Agency crop: 87% of the corn; 96% of the cotton; (RMA), provides producers with risk 88% of the soybeans; and 84% of the management tools to address crop yield wheat. and/or revenue loss for about 130 crops. Insurance policies are sold and completely serviced through 18 approved private Objectives and approach insurance companies. In 2014, federal crop U.S. crop insurance provides producers with insurance policies covered 294 million acres risk management tools to address crop with most crop insurance policies being yield and/or revenue losses for about 130 either yield-based or revenue-based. crops. For most U.S. farmers, federal crop Typically, revenue-based policies account insurance is the most important component for between 75% and 80% of all policies. of the farm safety net. The federal crop Government costs for crop insurance insurance program makes available peaked at $14.1 billion in 2012 when large subsidized policies to help farmers manage areas of the central and southern parts of risk associated with natural disasters, the U.S. suffered devastating drought. The including drought, excessive precipitation, government subsidy was about $8.7 billion flooding and price fluctuations. The average in 2014 (Shields, 2015). annual federal cost is approximately $8 The first area-yield insurance, the GRP, was billion. The farm safety net also includes the started in 1993 in the U.S. The GRP was farm commodity support programs, which initially offered for seven crops in over provide price and income support for a 1,900 counties within the U.S. and by 1999 narrow list of covered commodities such as the GRP was replaced by a new area-based corn, soybeans, wheat, rice, and peanuts. revenue insurance product called Group Agricultural disaster programs are available Risk Income Protection (GRIP). The GRIP for producers owning livestock or fruit uses county yields and within-year national trees. price movements to insure against declines in expected county revenue. Among the portfolio of FCIP policies, the acres insured Contribution to CSA under GRP and GRIP products grew rapidly Most agricultural revenue is subject to from only 2% of total acres insured in 1999 weather variations, and shifts in to 16% of insured acres by 2007 (Skees et agricultural supply and demand, which al., 2007) but has since suffered a often result in volatile market prices. Crop precipitous decline (USDA/RMA, 2015). insurance support is focused on producing These area-yield products represent the areas with less rainfall and more variable most substantial U.S. experience with crop-weather conditions. In this way, it index-based insurance. insures farmer revenue against production As concerning the target population, this impact due to unfavourable weather consists of U.S. commodity crop farmers. conditions. For example, in 2011, relatively In 2014, federal crop insurance policies high indemnities were paid in the Great Plains, where drought reduced crop yields 11 Contribution prepared by Dr Rebecca Shaw, Chief in the south and central areas of the U.S. Scientist at the World Wild Foundation for Nature (WWF).

25 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE while excessive precipitation affected based policies, a producer can receive an plantings and production in the north. indemnity if there is a yield loss relative to the farmer’s historical yield. Revenue- The U.S. crop insurance program provides based policies protect against crop revenue financial support to farmers in the U.S in loss resulting from declines in yield, price, the event of yield and/or revenue loss due or both. Other insurance products protect to drought, excessive moisture, hail, wind, against losses in whole farm revenue or frost, insects, and disease. Through these gross margins for livestock enterprises. payments, farmers are covered for their losses, and therefore, adapt to extreme Federal Crop Insurance coverage and weather events. This program does not policies include: address increasing the adaptive capacity of 1. Catastrophic Coverage (CAT) pays farmers, nor does it work to build resilience 55% of the established price of the in the system or decrease greenhouse gas commodity on crop losses in excess of emissions. The program does not 50%, which is the deductible or out-of- incentivize farmers to adopt risk-mitigating pocket loss absorbed by farmer. The measures and it encourages production federal government pays the premium methods that will become increasingly on CAT. CAT coverage is not available expensive to administer unless changes are on all types of policies. made. The crop insurance program promotes farm management practices that 2. Buy-up Coverage offers higher increase greenhouse gas emissions, coverage (a lower deductible) and is degrade soils, pollute waterways and use purchased instead of CAT. Policies excessive water. Resilience-building include: practices such no-till, cover cropping, and a. Yield-based policies: crop rotation are avoided because of their i. Actual Production History (APH) impact on short-term yield, and therefore, and Yield Protection (YP) policies on insurance payments. Environmental insure producers against yield losses conservation groups in the U.S often make due to natural causes such as the case for premium subsidies. They argue drought, excessive moisture, hail, that these might actually encourage wind, frost, insects, and disease. The production in environmentally fragile land. farmer selects the amount of average yield he or she wishes to insure and the percentage of the Characteristics and Design projected price to insure. If the Methodology of Weather Index harvest is less than the yield insured, Insurance the farmer is paid an indemnity In purchasing a crop insurance policy, a based on the difference. producer growing an insurable crop selects a level of coverage and pays a portion of ii. Area Yield Protection (AYP) the premium, which increases as the level policies insure producers against of coverage rises. The federal government yield losses due to natural causes pays the rest of the premium (62%, on such as drought, excessive moisture, average, in 2014) (Shields, 2015). hail, wind, frost, insects, and Insurance policies are sold and serviced disease. The farmer selects the through 17 approved private insurance amount of average yield he or she companies. The insurance companies’ wishes to insure and the percentage losses are reinsured by U.S. Department of of the projected price to insure. If Agriculture (USDA) and their administrative the harvest is less than the yield and operating costs are reimbursed by the insured, the farmer is paid an federal government under the Standard indemnity based on the difference. Reinsurance Agreement (SRA). Most crop insurance policies are either iii. Dollar Plan provides protection yield-based or revenue-based. For yield- against declining value due to

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damage that causes a shortfall in 3. Supplemental Coverage Option yield. Amount of insurance is based (SCO) may be purchased with CAT or on the cost of growing a crop in a Buy-up to cover part of the deductible specific area. A loss occurs when the of underlying policy. Eligible crops in annual crop value is less than the 2015 are corn, cotton, sorghum, rice, amount of insurance. The insured soybeans, barley, and wheat (Shields, may select a percentage of the 2015). maximum dollar amount equal to catastrophic coverage level. A reference yield calculation method used in the US Federal crop insurance program. b. Revenue-based policies: Current law requires that U.S. RMA, which i. Area Revenue Protection (ARP) administers FCIC, strive for actuarial insures producers against yield soundness for the entire federal crop losses due to natural causes such as insurance program. As a result, RMA sets drought, heavy precipitation, premium rates to only cover expected flooding, hail, wind, frost, insects, losses and a reasonable reserve. The and disease, and revenue losses agency is required to conduct periodic caused by a change in the harvest reviews of its rate-setting methodology, price from the projected price. The which sets premium rates according to the projected price and the harvest price average historical rate of loss. are 100% of the price determined by

futures contracts. The amount of insurance protection is based on the Distribution and Organization greater of the projected price or the Mechanism harvest price. If the harvested plus USDA's RMA manages the federal crop any appraised production multiplied insurance program and its mission is to by the harvest price is less than the promote, support, and regulate sound risk amount of insurance protection, the management solutions to preserve and producer is paid an indemnity based strengthen the economic stability of on the difference. America's agricultural producers. As part of this mission, RMA operates and manages ii. Actual Revenue History (ARH) the FCIC. RMA was created in 1996; the insures an average of historical FCIC was founded in 1938. grower revenues. Like other revenue The Standard Reinsurance Agreement coverage plans, ARH protects (SRA) is a risk sharing agreement between growers against losses from low the Federal Government and Approved yields, low prices, low quality, or any Insurance Providers (AIP). Under the SRA, combination of these events. the Federal Government, through the FCIC, will underwrite all crop insurance policies iii. Whole-Farm Revenue sold and serviced by AIPs. All farmers Protection (WFRP) insures revenue regardless of state and region are eligible of the entire farm rather than an for crop insurance coverage. Under this individual crop by guaranteeing a agreement, RMA sets the underwriting portion of whole-farm historic rules and premium rates. The AIPs and the average revenue (both crops and FCIC will then share in the premium livestock). To calculate the revenue as well as the loss exposure. guarantee, the plan uses five Technically under this agreement the AIPs consecutive years of a producer's are liable for all the policies they write but revenue and current-year expected are protected from catastrophic loss by the farm revenue. Livestock Policies FCIC. insure against declining market prices or gross margins for swine, The FCIC does the following: cattle, lambs, and milk. . sets standards and premium rates . approves new products

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. subsidizes farmer premiums (62% structure, there is an increase in moral on average) hazard as there is in any other type of . pays 100% of delivery costs through reinsurance program. Administrative and Operation (A and U.S. commodity crop farmers are the O) reimbursement to private clients. In 2014, federal crop insurance insurance companies policies covered 294 million acres (~ 83% . shares gains/losses with private of the total crop acres) under 1.2 million insurance companies policies with $110 billion in loss coverage . reinsures private insurance company (total liability). losses There are 17 AIPs that are designated by USDA to provide insurance coverage Program Impact and Outcomes through the SRA for the year 2016. The private companies Recently, new area yield products were . sell crop insurance policies through introduced by the RMA and Area Yield 12,500 agents Protection (AYP) replaced GRP while Area . collect and forward premiums to Yield Protection (ARP) replaced GRIP. Since FCIC then the two products have been offered . determine individual crop losses under what is know as Area Risk Protection through 5,000 adjusters Insurance (ARPI), which provides four plan . pay claims with funds from FCIC choices: AYP, ARP, Area Revenue . share gains/losses with federal Protection with Harvest price Exclusion, and government Catastrophic Coverage, which is only available under AYP. The uptake of the AYP Under the SRA, private insurance and ARP area yield products by producers companies may transfer some liability is still far below the peak uptake levels associated with riskier policies to the reached in the late 2000s. For example, in government and retain profits from less 2015 the premium totals for AYP and ARP risky policies. This transfer of risk is was only $170 million (USDA/RMA, 2015) accomplished through a set of reinsurance compared to combined premium totals of funds maintained by FCIC. Within 30 days $650 million for GRP and GRIP in 2007 of the sales closing date for each crop, (USDA/RMA, 2007). companies allocate each policy they sell to one of two funds that are maintained for While the advent of weather markets in the each company by state: “assigned risk late 1990s is often cited as the impetus for pool” or “commercial pool” which have a growing interest in index insurance for different amount of liability exchange and agriculture, it is worth noting that weather premium ratio shared between the FCIC insurance products have been used in the and the AIPs. U.S. for a number of years (Skees et al., 2007). Their success seems to be most The assigned risk fund is used for policies noteworthy among specialty crops where believed to be high-risk because it provides other forms of agricultural insurance may the most loss protection to insurance be limited (e.g., high value citrus crops companies through stop-loss coverage that vulnerable to freeze). Beyond that, the use reinsures against state-level disasters. of index-based weather insurance in the While the profit potential is greater U.S. is limited and may have been hindered compared with the Assigned Risk Fund, so by early mistakes in implementing these is the loss potential. The federal programs (Skees et al., 2007). For government assumes a large portion of example, it has been reported that in 1988, liability associated with high-risk policies. a major insurance provider introduced The Commercial Fund is for policies that drought insurance for farmers growing the companies expect to have the greatest Midwestern crops (e.g., corn and opportunity for profit and only a small soybeans). This effort failed in the first amount of losses. Under this current year due to poor underwriting decisions.

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Farmers understood that a major drought was emerging and reasoned that the probability of a payout was greater than implied in the contract. The insurance provider did not have adequate resources to pay the massive losses that resulted from the 1988 drought leading to court cases. Rainfall insurance has not been in the same fashion to Midwestern crop farmers since that time. This event was a major setback to what could have emerged in the U.S. markets12.

12 This discussion on weather index insurance for agriculture in the U.S. is based wholly on the report titled Scaling Up Index Insurance: What is needed for the next big step forward? By Jerry Skees et al. 2007.

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13 insurance within a larger risk management Case Study: Nigeria portfolio. Examples of the former include ACRE Africa (GSMA, 2015) and insurance linked with credit in Zambia (Mookerjee, Background 2016). The R4 Rural Resilience Initiative is Climate change poses significant risks to a good example of the latter approach agricultural development and, by whereby farmers can pay for the insurance extension, food security, poverty reduction through labor on climate-smart agricultural and political stability. This is especially the projects (Food for Assets), alongside access case in Nigeria where agriculture to credit and savings (Madajewicz et al., contributes over 40% of the GDP, over 2013). 70% of the workforce is engaged in agriculture-related activities and millions Objectives and approach live in rural areas where they are In 2014, Nigeria’s Federal Ministry of dependent on agriculture for their Agriculture and Rural Development livelihoods. In 2012, torrential rains across (FMARD) proposed a major expansion of Nigeria caused farmers to lose crops to agricultural insurance in the context of floods. In 2013, maize farmers in the north other reforms to the agricultural sector, were hit by drought that halved their and as part of the implementation of its expected yields. These climate-related National Agricultural Resilience Framework shocks can undermine development gains (NARF). The commitment to expand by destroying rural infrastructure and insurance to Nigeria’s roughly 15 million eroding farmers’ productive assets. Even smallholder farmers is one of the pillars of in climatically-favourable years, climate NARF. FMARD is seeking to enhance risk contributes to farmers’ reluctance to farmers’ access to accurate weather invest in their farms. Farmers also have information and increase the participation limited access to credit and remain trapped of the private sector in the provision of in a low income-low productivity cycle. weather insurance products to millions of Nigeria’s smallholder famers. FMARD has Experiences from index insurance initiatives aligned with partner Ministries, in India, Kenya, Rwanda, Ethiopia and Departments and Agencies (MDAs) focused Senegal suggest that bundling insurance on agriculture and the environment for with production inputs and finance can closer National policy synergies. make insurance more attractive to farmers. Well-designed index insurance can achieve Contribution to CSA specific risk objectives such as protecting farmers’ livelihoods in the face of major One of the objectives of NARF is to ensure climate shocks by enhancing farmer uptake that Nigeria’s agricultural sector is able to of drought tolerant crop varieties and other cope with the shocks and stressed linked to agricultural technologies (Carter et al. climate change. In its bid to promote 2016; Karlan et al. 2014). In insurance agricultural resilience, Nigeria joined the program this has been achieved either Global Alliance for Climate-Smart through the direct bundling of farm inputs Agriculture (GACSA), to contribute to the with insurance, or through including goal of ensuring that 500 million smallholder farmers worldwide can adopt Climate-Smart Agriculture (CSA) 13 Contribution by Dr Jon Hellin, Senior Scientist at the International Maize and Wheat Improvement technologies and practices through Center (CIMMYT); Dr James Hansen, Senior agricultural insurance as well as other Research Scientist at the International Research options. Nigeria is also part of the West Institute for Climate and Society (IRI); Dr Helen Africa Alliance for Climate-Smart Greatrex, Associate Research Scientist at the International Research Institute for Climate and Agriculture launched by the Economic Society, Columbia University; Dr Robert Zougmoré, Community of West African States Africa Program Leader of the CGIAR research (ECOWAS). programme on Climate Change, Agriculture and Food Security (CCAFS).

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Characteristics and design index insurance initiatives (Greatrex et al., methodology of Weather Index 2015). Insurance FMARD and CCAFS are also drawing on the Bringing together relevant actors from the expertise of Pula Advisors, a consultancy public and private sectors company whose staff were intricately Since September 2014, FMARD and the involved in the design and implementation CGIAR Research Program on Climate of one of the most successful index Change, Agriculture and Food Security insurance initiatives to date: the research program (CCAFS) have been Agriculture and Climate Risk Enterprise working together to design a roadmap for (ACRE) (formerly known as Kilimo Salama) evidence-based insurance development for that has reached 200,000 farmers in Kenya Nigeria’s farmers. CCAFS organized an and Rwanda. Pula Advisors and CCAFS are initial knowledge-sharing workshop in doing pilot-testing in Nigeria of both London in January 2015. This was followed weather-based and area yield index by a planning meeting in Zurich in May insurance. With more than 5.56 million ha 2015, hosted by the re-insurer Swiss Re. of land planted to maize in 2013 (or about Participants in the workshops included 16% of all of Africa’s maize area combined) FMARD, the heads of the Nigerian and the pilot-testing is taking place in maize- Indian Agricultural Insurance Corporations, growing areas. CCAFS, Swiss Re, German Corporation for International Cooperation (GIZ), Nigerian Roadmap document for index Meteorological Agency (NIMET), Nigerian insurance Agricultural Insurance Corporation (NAIC) The outcome of work between FMARD, and Nigerian Insurers’ Association (NIA). CCAFS and other key actors is a roadmap

document detailing a phased expansion of There are many different approaches to insurance coverage for Nigeria’s designing and implementing index agricultural sector including its smallholder insurance not least whether it is a weather- farming population. Agricultural insurance based index or one based on area yield. has been a feature in Nigeria for over two Nigeria can learn from past and existing decades and the roadmap document aims index insurance schemes worldwide that to consolidate existing knowledge and CCAFS has analysed and documented. The information on the risk profiles of value effectiveness of communication with chains, while creating a mechanism for farmers is a key factor that influences trust expanding insurance products and services and farmer uptake of all technologies and to all smallholder farmers to increase their practices, including insurance. This is resilience to shocks and stresses which especially the case when it comes to index may undermine productivity and eco- insurance. Nigeria’s ambitious plans to efficiency. FMARD is expected to launch rapidly scale up agricultural insurance will officially the Roadmap document in 2017. require efficient, scalable mechanisms to engage farming communities, and build A key area that FMARD and CCAFS are their capacity to understand and hence working on is data availabilty. Index-based effectively demand appropriate insurance insurance is particularly dependent on the products. Farmers need to trust that the availability of reliable, high-quality people they are paying to take on their risk meteorological, hydrological, agronomic will be around to provide payouts, and and economic data. Because the need to understand and trust the structure relationship between crop yields and of the contract. Partnering with weather observations weakens, and organizations that already interact with therefore basis risk increases, with farming communities, and that have increasing distance, early index insurance already built trust, has proven to be pilots only offered index insurance to effective in several successful agricultural farmers within a given distance from a

31 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE long-term weather station. Sparse and challenges that include: limited and generally declining weather observation asymmetric information; crowding out by networks have been identified as a major post-disaster relief efforts; limited access challenge to scaling up weather index to reinsurance markets; lack of insurance insurance in Nigeria. culture; and inadequate regulatory environments. The development of The Nigerian Meteorological Agency effective market-based agricultural (NIMET) maintains a network of roughly 60 insurance, requires government support in climate plus synoptic observing stations. five key areas: data systems; awareness Although the country has many more and capacity building; facilitating agromet and rainfall stations (roughly international risk pooling; “smart” 500), most of these are currently under the subsidies; and an enabling policy control of state governments rather than environment that facilitates the NIMET. Providing FMARD with access to all establishment of multi-stakeholder available, quality-controlled historical and partnerships. There are three immediate monitored meteorological data is a priority challenges: for developing weather index insurance. Given their multiple uses, these data will First, it is important to form a task force of make the greatest contribution to society if public sector champions who will spearhead the government treats them as public insurance efforts in order to create a goods, and supports their collection and regulatory environment that makes it free availability. Although the index attractive for insurance companies to enter insurance market might provide incentive the market. For agricultural insurance to be for private sector investment in data viable, insurance companies need collection, particularly automatic weather reinsurance arrangements to protect them stations, socially optimum investment and from major spatially-correlated climate use of data requires public investment. shocks, such as drought. However, early agriculture insurance markets like Nigeria Challenges and lessons learnt struggle to reach premium volumes that attract international reinsurers, limiting the Agricultural insurance was introduced to growth of the market. Regulation in Nigeria Nigeria in 1987 through the Nigerian also regulates the involvement of the Agricultural Insurance Scheme (NAIS). The international reinsurers. The insurance law Nigerian Agricultural Insurance Corporation act of 2003, section XII point 72.4 (NAIC) was established in 1993 as a public- stipulates that only under exceptional sector corporation to administer NAIS and circumstances may any reinsurance or its associated subsidies, foster agricultural insurance be placed outside of Nigeria with credit, and generally promote increased international insurers and or reinsurers, agricultural production to reduce the need and that such an exception needs to be for ad-hoc agricultural disaster assistance approved by the National Insurance from the government. Up to 2013, NAIC Commission. Since much of the technical held a regulatory monopoly on providing and financial capacity in agriculture agriculture insurance. This regulation was insurance is generally with reinsurers lifted in 2013, and since then six other rather than domestic primary insurers, this insurance companies have applied for, and regulation is likely to limit the willingness of received a license to provide agriculture international reinsurers to participate in insurance. The focus of these companies any product in terms of technical capacity has, however, been on medium- and large- as once the product has been established scale farmers, and their capacity and there is a risk that they may be pushed out exposure in the area of index insurance is of the market by this regulation. limited.

Second, there is a need to develop public- A strategy for expanding insurance for private partnerships that incentivize and Nigeria’s smallholder farmers must address support companies to develop innovative

32 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE products and services for agriculture. The index and area-yield index insurance, private sector will require support at the designed in a manner that progressively early stages of development, as initial set builds the capacity of all relevant up costs for innovative new products and stakeholders, and strengthens the distribution channels are often high. The knowledge and evidence base for scaling Nigerian Government should therefore up. Pilot implementation provides an consider a fund for those companies willing opportunity to test and adapt several to implement innovative products, as this innovations that have proven useful in will de-risk insurance companies from other parts of the world, including: entering the sector and committing their human and insurance capital. Such a fund . Innovative ways to build farmers’ could support technical assistance for understanding of the complexities of product development, pilot testing, index insurance, e.g., through feasibility studies, development of financial interactive radio programing; education, or testing of innovative . Involvement of farmers and other marketing and distribution channels. Such key stakeholders in the design of funds have been done in other countries – insurance products and services; although generally by development agencies such as the private sector arm of . Development and use of merged the World Bank, IFC – and have resulted in satellite-station rainfall and innovative schemes that subsequently temperature data sets as an scaled up. Lessons from the beneficiary alternative to sparse ground-based companies should be shared, so that the observations; sector as a whole can benefit from these . Identification of suitable climate- experiences, returning a public benefit of smart agricultural technologies (e.g. these initiatives developed by the private drought tolerant crop varieties that sector. are being bred for different agro- ecological zones in Nigeria) that lend Third, a phased process for developing themselves to bundling with crop agricultural insurance should start with insurance initiatives. wider pilot implementation of both weather

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In an era of rapidly changing weather Conclusions scenarios, there are possibilities of new weather patterns which may not exist in Lessons learned, key challenges past data leading to dissatisfaction among and potential for scaling up14 farmers. Product designs need to improve so that claims payouts correspond to Increasing climate risks, large networks of shortfalls in yield in most cases (Clarke et weather stations and financial institutions, al., 2012). New methodologies and compulsory insurance for farmers taking on computer-based crop growth simulation institutional credit, large premium subsidies models have shown success and this needs and relatively shorter time periods for claim to be used to trigger ad hoc design settlements have made weather-based mechanisms. index insurance schemes potentially A comprehensive 2012 study done to attractive to farmers exposed to the review WBCIS (Clarke et al., 2012), showed uncertainty of climate-related impacts. It is that the key factors of farmers’ important to note, however, that these dissatisfaction with weather-based schemes still have a large basis risk due to: insurance were mostly related to: i) significant spatial and temporal vi) Location of reference weather variability in precipitation; station ii) limited density of weather vii) Mechanisms for grievance stations to capture it, thus redressal affecting data availability and quality; viii) Convenience of enrolment in insurance scheme iii) non-coverage of all weather- related perils; ix) Resolution of queries iv) modification of risk exposure x) Responsiveness of by different planting times and intermediary agencies, such as use of adapted varieties; banks v) differences in soil types and It is obvious that the widespread spatial management practices (WFP and temporal variation in rainfall should be and IFAD, 2011; FAO, 2008). taken into account, together with strengthening the aspects of delivery of Insurance schemes are typically developed crop insurance schemes, and building and evaluated against past weather data awareness in order to scale up weather- (Clarke et al., 2012). Basis risk, or the based index insurance schemes. While differences between a payout and a there is a growing effort to increase the farmer’s actual loss, is sometimes quoted density of weather stations, greater as a key constraint for index insurance. analyses of satellite estimates of weather The R4 project has dedicated much time to needs to be explored vigorously. Similarly, minimizing basis risk events through there is a need to explore alternate delivery examining multiple data sources, and has channels to sell insurance policies, build invested significant resources in discussing capacity, address queries in real-time and what a community might do in a basis risk also to ensure timely payments. The huge event. As such, the R4 initiative aims for a power of digital technologies such as crowd situation where farmers will no longer see sourcing, cloud computing and digital the event as a failure, but rather as a year banking for increasing insurance literacy where they need to take option B (e.g., use and penetration needs to be assessed and a community savings fund or their savings tapped. at the MFI). As per the first two case studies reported in

14 Contribution prepared by Professor Jimmy the present publication, crop insurance in Adegoke, University of Missouri-Kansas City (UMKC) India is linked to farm loans, thus and Bianca Dendena (FAO).

34 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE increasing access to credit for resource- less likely to be trapped in a poverty cycle poor farmers. This income presumably goes (Hellmuth et al., 2009). In line with the towards improved technologies, but there is other country cases reviewed, crop index still lack of clear evidence that insurance insurance solutions reported for the ARS triggers investment in climate-smart scheme enable farmers to increase their agriculture practices and technologies. A productivity, generating additional revenue, study conducted in Burkina Faso, however, and potentially savings for education and on the relationship between maize index health expenses for their families. As a insurance and the agricultural performance consequence, farmers’ confidence in the of the farmers involved in the Assurance future can be improved so that they are Récolte Sahel (ARS) crop insurance scheme enabled to change their perspective from a (Koloma, 2015), does provide some day-to-day vision of life, to a long-term encouraging signs in this sense. By perspective (De Bock et al., 2010). comparing subscribers to the ARS scheme Specifically from an operational point of and non-subscribers, in fact, the first group view, longer and more flexible reinsurance was found to be more likely to invest in contracts would help in reducing the annual agricultural inputs compared to the latter. price variability, and a larger distribution This also applied to the purchase of strategy needs to be implemented in order fertilizer, the planted surface and the to reach this scale. One useful lesson in this access to credit. regard is in the case of Senegal, where the One of the key lessons of this initiative is public-private partnership with CNAAS that due to their use of insurance, farmers contributed to the successful scaling-up of are encouraged to invest more, and thus the scheme. Additionally, distribution via are more prone to taking risks. The ARS aggregators allows a broader reach for the initiative also showed that building local products, and should be considered for an insurance capacity is necessary in order to optimized distribution strategy. succeed in implementation. Furthermore, it The case study referred to as the R4 should be considered that government initiative highlights another important point subsidies represents a critical advantage in with respect to the dissemination of index- order to help develop the market, as the based insurance schemes, that addressing cost of the products remain one the main the issue of data poverty is vital for scaling hurdles for market’s expansion. Current up. In the R4 project, the index is based on insurance schemes do not distinguish the output of the ARC2 satellite rainfall between technology adopters and non- estimates, supported by information from adopters, however, and provide no vegetation remote sensing, farmer incentives for climate-smart agriculture. For interviews, on-site validation and tools such example, farmers conserving water and as weather generators and crop simulation using this resource sustainably scientifically models. will have lower risk, and therefore their premium should be lower. This is especially Farmer-driven design is one method of important and should be thoroughly taken bridging this gap and has been credited as into account when developing index-based key to scaling in many cases studies. All of insurance schemes: as the cost of the the projects that engaged in meaningful products still remains an important barrier, discussions with farmers reported large in fact, ad hoc solutions to reduce it could benefits to index design and uptake. For be coupled with the adoption of climate- example, recent work has shown that smart practices with the aim of playing experimental games in the disseminating the CSA approach. R4/HARITA project significantly increased demand for the product (Norton et al., Crop index insurance solutions build PG’s 2014). The R4 project considers the use of clients’ resilience to climate change, as they the games so important that they use the receive payouts in the event of adverse first year in a country as a “dry run”, where weather. They are less economically the insurance can be tested and discussed vulnerable to climate variations, and are with farmers before it is formally

35 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE purchased. A specific focus on education change in SSA. It is, in fact, by far the building has also played a key role in largest and fastest growing microinsurance building trust and demand. In the R4 scheme in Africa, stemming from the Kilimo project, this was achieved through working Salama initiative. In the present paper, in close collaboration with farmers through specific mention is made to the Replanting community discussions. Guarantee program (RPG), which is referred to as the ACRE Africa’s signature In R4, a holistic approach is at the core of agricultural insurance product. The the program: insurance is purposefully only implementation of such a program one component of a larger risk highlighted one of the biggest issues to management system, which includes risk developing insurance products for reduction through better agronomic smallholders, and so the value added of practices, prudent risk taking through ACRE Africa’s model in providing insurance access to credit, and improved risk reserves services. The relevant distribution costs through access to savings. As part of this against the reduced value of transactions project, Norton et al. (2012, 2014) found for each farmer are overcome through that farmers showed increased demand if partnerships with local mobile network insurance was linked to other risk operators (see Safaricom’s M-PESA). This management strategies. This strategy is at points to the need for building and further the core of the CGIAR Research Program on developing existing relationships Climate Change, Agriculture and Food established in local contexts, which is also Security (CCAFS) program called Climate- embedded in ACRE Africa’s approach Smart Villages (CSV) for comprehensive strongly based on working with farm risk management in agricultural landscapes. aggregators (input providers, lending This includes mobilising farming institutions, cooperatives and out-growers). communities and local governments and The importance of cooperating with actors raising their capacity to adopt climate- on the ground is also acknowledged and smart agriculture practices and technologies valued through the active involvement of related to conservation agriculture, efficient local financial institutions and governments, management of water and nutrients, use of working side-by-side with global solar energy, agroforestry and use of reinsurance companies and regulatory improved seeds. Climate information agencies. Interestingly, the experience of services such as seasonal and short-term the RPG product shows that weather forecasts are made available to notwithstanding the attractive offer an farmers for contingency planning and insurance product may be associated with, action. In this framework, index insurance it is the trust in the insurance provider is an option provided among others. which makes the real difference in the Climate-smart agriculture practices and taking up of the product, as well as the technologies reduce risk exposure of thorough understanding of its conditions. farmers in most seasons, but in extreme Therefore, building on trust and climatic risk seasons, insurance acts as a strengthening financial education and safety net and protects farmers’ income. At training are to be considered as paramount present, the insurance in CSVs is not priced elements backing the scaling up of differentially. A verifiable and insurance programs. implementable scheme that links insurance premiums to climate-smart agriculture The U.S. case study reports on a technology adoption in the longer term will consolidated crop insurance program ensure more resilient agricultural systems providing producers with risk management and livelihoods. tools to address crop yield and/or revenue losses for about 130 crops. As such, for The reported experience referred to as most farmers countrywide, this federal crop ACRE Africa is indicative of the increasing insurance program is the most important relevance of agricultural insurance as a component of their farm safety net. The means to reduce vulnerability to weather program is intended to cover farmers for shocks in the face of increasing climate

36 REVIEW | INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE their losses affecting yield and/or revenue, needed. Innovations like weather-index but does not address increasing the insurance for agricultural and natural adaptive capacity of farmers, nor does it disaster risks have to be part of the solution work to build resilience in the system or as key elements of integrated risk foster climate change mitigation. On the management strategies. Effectively contrary, resilience-building practices such implementing and expanding index as no-till, cover cropping, and crop rotation insurance programs will require strong are avoided because of their impact on collaboration among governments, donors short-term yield, and therefore, on and private sector partners. Past and recent insurance payments. With specific reference experiences show that index insurance to weather-based insurance products, their must also be placed within a larger usage in the U.S. is reported to be developmental context, motivated by the established to some extent just for crops goal to enhance the resilience of where other forms of agricultural insurance agricultural producers by strengthening may not be suitable, thus, being rather their capacity to produce more food, more limited. Poor underwriting decisions in the sustainably and with reduced risk. past are singled out as the major setback in this case, and reemphasize the need to fine-tune the insurance products with respect to local conditions, provided the availability of data. The final case study reported on in the present document, in Nigeria, provides a different perspective as compared to the others as it traces the roadmap currently being developed by the Nigeria’s Federal Ministry of Agriculture and Rural Development (FMARD) and CCAFS, with the aim of defining a phased expansion of insurance coverage for Nigeria’s agricultural sector. Hence, it captures a work-in- progress experience where some key points have already emerged as significantly affecting the uptake and scale up of index insurance programs. First, data availability is acknowledged as particularly sensible, with public investment in data collection highlighted as socially optimal, notwithstanding the importance of the private sector to provide support in this sense. The commitment of the government is also required in other key areas, namely awareness and capacity building, facilitating international risk pooling, “smart” subsidies, and an enabling policy environment that facilitates the establishment of multi- stakeholder partnerships. In light of the evidence provided by the case studies presented in this document, and given the challenges of climate change and the uncertain future that it portends for agriculture, improved financial services for producers everywhere are desperately

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REVIEW ON INDEX-BASED INSURANCE FOR CLIMATE-SMART AGRICULTURE

Reviews are documents providing evidence for critically analyzing key issues affecting the adoption of the Climate-Smart Agriculture approach with the aim of building on existing initiatives and/or scaling them up. Please visit GACSA website for more information: www.fao.org/gacsa/en/

Authors Jimmy Adegoke, University of Missouri- Kansas City (UMKC) Pramod Aggarwal, CGIAR Mark Rüegg, Celsius Pro James Hansen, IRI Daniella Cuellar, WFP Rahel Diro, IRI Rebecca Shaw, WWF Jon Hellin, CIMMYT Helen Greatrex, IRI Robert Zougmoré, CCAFS

Editors Bianca Dendena, Consultant for FAO Simone Sala, Consultant for FAO

Coordinator Federica Matteoli, Natural Resources for FAO

Acknowledgments GACSA deeply thanks all the authors and their institutions, who kindly contributed to the development of this review. Moreover, special thanks are due to: Shukri Ahmed, Senior economist, FAO Daniel Osgood, Lead Scientist, IRI

Funding for the development of both the webinar and the brief was provided by the Italian Ministry of Environment, Land and Sea (IMELS), through FAO’s International Alliance of Climate - Smart Agriculture (IACSA) project.

Publishing date: October 2017

Cover photo credit: ©FAO/Simon Maina

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