Private Sector Support to Climate Resilience in Zambia
Final Report April, 2013
For public release
Produced By.. Table of Contents
1. Introduction 2. Index Based Insurance Models- Worldwide 3. Agriculture Insurance in Zambia 4. ZAMBIA-Geographical and demographical status, Climate and Agro-Ecological Zones 5. River Basins- Zambia 6. Agriculture in Zambia 7. Nature of Climate Change and Weather volatility, and impact on agriculture 8. Agricultural Risks and Coping Mechanisms 9. Issues related to agriculture risk management 10. Available weather monitoring infrastructure 11. Requirement of Weather Monitoring Stations 12. Scope for Index Insurance in Zambia 13. Supply side Bottlenecks 14. Investment Scope for IFC – SPCR 15. What to do to recover investments fast? Introduction
The proposed transformational objectives Funding Agency of the SPCR are; A. To strengthen the adaptive capacity and livelihoods of vulnerable farmers and rural communities to climate variability and change B. To strengthen climate resilient infrastructure policies and pilot their effective implementation C. To strengthen the coordination of early warning and climate information systems, to ensure availability of reliable and user-friendly climate Consulting Firm: Consortium information for an effective climate risk planning
Key Areas of Private Sector Involvement in Private Sector Support to Climate Resilience in Zambia Feasibility study on Agricultural Weather Index Based Insurance Looking in to the possibility of design and implementation - on commercially sustainable basis In Partnership with GIIF/IFC
NB: Names of institutions, companies, projects and products in the report have been replaced with letters e.g. Company A, B, C or Product 1, 2 3 in order to maintain confidentiality of entities, projects and products involved. Team composition
Sl. No. Consulting Team Organisation’s Name 1 D. Sattaiah BASICS Ltd. 2 A. Satheesh BASICS Ltd. 3 Sonu Agrawal WRL 4 Ulrich Hess MicroEnsure 5 Joseph MicroEnsure 6 Juliet Kyokunda MicroEnsure Research/ Support Team 7 CB Mehta WRL 8 Karthik Kumar WRL 9 Nisha Kumari BASICS Ltd. Index Based Index Based Insurance at various level Insurance Models- It targets farmers directly. Micro level Over a dozen countries in Africa and Central America Worldwide Index Based have success-fully implemented it. Insurance A pioneering example is that of BASIX in India in 2003 Index based Weather (Crop) when it developed an Index Based Insurance Scheme for Insurance represents a newly farmers, and expanded it to cover from the initial 230 farmers to more than 40,000 farmers in three years time. developed alternative to the Meso level Here, payouts are made by an insurer either to national traditional crop insurance Index Based banks or to NGOs so that they can respond to economic programs for smallholder Insurance losses that might have resulted from a natural disaster. An example of such a scheme is being implemented in farmers in the developing Peru, in which the El Niño–Southern Oscillation (ENSO) countries. It aims to mitigate related climate indices are used as a proxy for extreme the hardship of the insured rainfall. Macro level At a macro level, a government institution or an farmers against the likelihood Index Based international charity uses index insurance for a disaster of financial loss on account of Insurance relief fund or to fund relief activities following a natural anticipated crop loss disaster. Ex: Mexico (Fondo de Desastres Naturales -FONDEN) resulting from incidence of and the Caribbean Community (Caribbean Catastrophe adverse conditions of Risk Insurance Facility). weather parameters like rainfall, temperature, frost, Index insurance is a simplified form of insurance, where humidity etc. payments are made based on an index, rather than measurement of crop loss in the field.
The history of weather index insurance for agriculture in developing countries Index Based started only as recently as 2003 Insurance It has only moved from the pilot scale to more commercial implementation in India and Mexico
Many other countries, such as Thailand; Indonesia; Guatemala; Nicaragua; Honduras; Tanzania; Kenya; Ethiopia and Nepal, are developing or testing this product in feasibility studies and/or pilot programs for agriculture Index Insurance: Advantages and Challenges Prerequisites for a successful Index based Insurance Prerequisites Description ADVANTAGES CHALLENGES Availability of historic For identifying the weather pattern and designing of Reduced Adverse Basis Risk weather data for product the index based products, it was very necessary to Selection design and pricing have at least couple of years historical data sets of Reduced Moral Data Availability the aimed weather indicators; Example: Rainfall, Hazard and Modelling Temperature, Humidity, wind speed Accuracy Availability of functional For successful rollout and maintenance of the index Lower Integrity of weather stations or based weather contracts the continuity of the data Administrative Weather Stations satellite solutions- supply is very crucial. Hence the focus should be on Costs creation and maintenance of the required Standardized and Farmer Extension infrastructure Transparent and Education Local insurance capacity The local insurers has to be capacitated to deal with Structure for underwriting the risk the new sets of products (i.e., Index based) Facilitation of Product Options International reinsurance Facilitating for the reinsurance arrangements which Reinsurance still Limited capacity to absorb the will not be very easily accessible to the local ceded risk Insurers in the initial days of the program Regulatory environment The regulatory environment should be conducive enough to support or develop the new product lines Product distribution Distribution channel will play a crucial role in channels reaching out the target market in a cost efficient way Key Comparative Statistics of countries implementing /piloted IBWI
GDP Per Capita and Farmers' Average Annual Income
Farmers' average annual income (USD in '000s) GDP- Per Capita (PPP) (USD in '1000s)
Agriculture Sector Contribution to GDP and Labour in Agriculture Malawi Zambia Agriculture contri-bution to GDP (%) labour in agriculture (%) Kenya 100 Ethiopia 80 India 60 Srilanka 40 Thailand 20 China
0 Peru Mexico Brazil Russia Agriculture plays a very crucial role in Zambian Economy USA
0.00 50.00 100.00 150.00 200.00
In Zambia, though about Agriculture contributes 21% to the National GDP, average annual income of farmers’ is very low (approx. 328 USD), as the no. of small farm holders is huge (around 75%) and vulnerable to weather/ catastrophes. Lessons learned from Key Lessons for Index Based Insurance in Zambia the Successful Index Focus Area Description Based Insurance Both Indian and Mexican governments had experience of more Models than 20 years on area-yield based crop index insurance and state sponsored disaster relief programs. Both were looking for Background of crop mechanisms to improve the existing programs in terms of re- Implementation through commercial insurance/ disaster insuring the risks and expediting claim settlements. They banks, MFIs and contract growers have relief is necessary substituted existing programs with IBWI. Without the massive better chances of success. prevailing crop insurance/ disaster relief tradition and infrastructure, which existed in both the countries, scaling up of IBWI to the present level would have been difficult. The bundling of insurance with A very granular meteorological infrastructure is necessary to Meteorological reduce basis risks in claim settlements. Unless the insurance agricultural loans and contract farming Infrastructure is products pay adequately and fairly when there are crop losses, necessary scheme reduces the premium burden on the schemes cannot be scaled up. the farmer and also helps banks and In several cases, the premiums, which farmers can afford, do not match up to the actuarial premiums of the desired insurance contract growers manage their risks. coverage. This mismatch severely affects scalability and in such Premiums should be cases, the deficit in the premium may be met by other entities in affordable Support from government in the form the agricultural value chain (e.g. input suppliers or procurement agencies for whom farmer’s sustainability is strategically crucial) of premium subsidies and its mandate to or the government. compulsorily cover agricultural loans is Lot of effort is required towards educating the farmers on the IBWI product. An institution on the ground has to constantly hand also crucial for successful pilots (as was hold the farmers over 2-3 seasons till the farmers understand the the case in India and Mexico) product and the claim settlement processes. Experience worldwide suggests that information dissemination takes time Field partners and hence requires an active engagement with field partners for
years. Therefore, agencies that engage with farmers on various aspects of farming and have a revenue model based on multiple farm level services (rather than just IBWI alone) prove more useful and sustainable. Agriculture Insurance in Zambia
Zambia has a small yet robust system of agricultural Types of Agricultural insurance products offered by insurance. Insurers in Zambia The insurance companies are regulated by the Pensions Type of and Insurance Agency (PIA). Name of product Risks covered Remarks Insurance in Zambia is regulated by the Insurance Act, company 1997, as amended by Act 26 of 2005 offered Damage due to fire, Until the last decade, agricultural insurance was only lightning, storm, malicious Risk cover for offered by Company F Damage Company D damage, transit and theft harvested Crops Now private insures also provide agricultural insurance based products of harvested crop, whilst stored. damage by animals Insurance coverage is skewed towards large commercial farm owners Damage due to fire, lightning, storm, malicious Commercial agriculture insurance penetration Risk cover from Damage damage, transit and theft constituting just about 2.5% (approx $ 4 mn) of the total Company F harvest to premium collected by General Insurance Companies based of harvested crop, auction. The insurance companies mainly reach farmers through damage by animals bank-assurance tie-ups and arrangements with large Separate covers for hail farmer associations Damage due to fire, The products are mainly on the lines of Multi-Peril Crop lightning, storm, malicious Risk cover for Damage Insurance (MPCI) with customizations according to crop Company H damage, transit and theft harvested Crops requirements based of harvested crop, whilst stored. Present claim settlement mechanism is costly and inefficient damage by animals, Damage due to fire, The insurance companies use miscellaneous lightning, storm, malicious methods to verify a claim, includes: conducting crop Risk cover for cutting experiments in the area, using proxy loss Damage damage, transit and theft Company E harvested Crops measures such as rainfall in the vicinity based of harvested crop, whilst stored. damage by animals Separate covers for hail ZAMBIA Geography Southern Africa, east of Angola, south of the Location Democratic Republic of the Congo ZAMBIA- at a glance Country overview Capital- Lusaka, Provinces- 10, Districts- 72 Total: 752,618 sq km Area land: 743,398 sq km water: 9,220 sq km Coastline 0 km (landlocked) tropical; modified by altitude; rainy season (October to Season April) Terrain mostly high plateau with some hills and mountains arable land: 6.99% Land Use permanent crops: 0.04% other: 92.97% (2005) Irrigated Land 1,560 sq km (2008) Demography Population (2011) 13.5 Mn (40% Urban, 60% Rural) Population density 18 people per sq. Km (2010) Source: http://www.zambia- Population Growth 2.8% (Average Annual Population Growth rate mining.com/africa.html rate between 2000 – 2010) Developing African country with a large part of the Climate inhabitants living in rural areas. periodic drought; tropical storms (November to April), Natural Hazards Situated on the great plateau of Central Africa. Flood flood prone areas Kafue, Zambezi and Luangwa river basins Tropical climate with three distinct seasons, the cool and dry season, the hot and dry season and the hot and wet drought prone areas Southern/south eastern Zambia season Economy Crops: corn, sorghum, rice, peanuts, sunflower seed, Landlocked country, surrounded by 8 neighbouring vegetables, flowers, tobacco, cotton, sugarcane, countries Agriculture Products Cassava (tapioca), coffee; Towards North: Democratic Republic of Congo and Tanzania Livestock: cattle, goats, pigs, poultry, milk, eggs, hides Towards East: Malawi and Mozambique to the east, Copper mining and processing, construction, Towards South: Zimbabwe, Namibia and Botswana Industries foodstuffs, beverages, chemicals, textiles, fertilizer, Towards West: Angola horticulture
Source: http://www.zamstats.gov.zm/media/agr_rpt.pdf Provinces of Zambia Geographical and demographical status of Zambia
Zambia is divided into ten provinces namely: Central, Copperbelt, Eastern, Luapula, Lusaka, Northern, Muchinga, Northwestern, Southern and Western.
Muchinga province was separated from Northern Province recently in
2011 and is consisting of Chinsali, Province Capital Districts Districts Central Kabwe 6 Chibombo, Kabwe, Kapiri-Mposhi, Mkushi, Mumbwa, Serenje Isoka, Mafinga, Mpika, and Copperbelt Ndola 10 Chililabombwe, Chingola, Kalulushi, Kitwe, Luanshya, Lufwanyama, Nakonde districts from Northern Masaiti, Mpongwe, Mufulira, Ndola Eastern Chipata 7 Chadiza, Chipata, Katete, Lundazi, Mambwe, Nyimba, Petauke province and Chama district from Luapula Mansa 7 Chienge, Kawambwa, Mansa, Milenge, Mwense, Nchelenge, Samfya Eastern province Lusaka Lusaka 4 Chongwe, Kafue, Luangwa, Lusaka Muchinga Chinsali 6 Chama, Chinsali, Isoka, Mafinga, Mpika, Nakonde Northern Kasama 8 Chilubi, Kaputa, Kasama, Luwingu, Mbala, Mporokoso , Mpulungu, Almost 60% of Zambian Mungwi North- Solwezi 8 Chavuma, Ikelenge, Kabompo, Kasempa, Mufumbwe, Mwinilunga, population lives in rural areas. Western Solwezi, Zambezi Southern Livingstone 11 Choma, Gwembe, Itezhi-tezhi, Kalomo, Kazungula, Livingstone, Mazabuka, Monze, Namwala, Siavonga, Sinazongwe Western Mongu 7 Kalabo, Kaoma, Lukulu, Mongu, Senanga, Sesheke, Shang'ombo Zambia Lusaka 74 districts Climate and Zambia is divided into 28 agro-ecological zones, which are further grouped in Agro-Ecological three main zones, mainly on the basis of rainfall. Zones The northern and north-western provinces have an annual rainfall of about 125 cm (50 in), while areas in the far south have as little as 75 cm (30 in).
Region I Region 2 Region 3
•covers the valley •covers the central part •covers Northern, areas located in the of Zambia Luapula, North- extreme southern and western, Copper-belt western parts of the and northern parts of country Central province
Source: http://www.chikyu.ac.jp/rihn_e/project2009/E- 04.html Agro Ecological Avg. rainfall Min. (Dec Elevation Growing Risk of Occurrence of Frost Agricultural Importance Regions (mm/ Year) - Feb) (meters) Season (days) Drought in Dry Season < 300 - 900; Medium to Risk in Plateau Suitable for production of small Region I 19 – 21 80 – 129 800mm 900 - 1,200 High Areas grains and livestock rearing Most productive areas in the Region II a 17 – 18 800 - 1,000 Medium to Risk in the country in both food and cash crops 900 - 1,300 100 – 140 Mm Low Central Plateau High potential for Cassava and rice Region II b production as well as cattle rearing > Very Low Some risk in the High Cassava growing and Region III 14 – 16 1,100 - 1,700 120 - 150 1,000 mm South-West consuming region Source: Institute for African Studies (1996). Agricultural Sector Performance Analysis, IAS, University of Zambia, Lusaka Indicators KAFUE BAROTSE Geographi . Evenly spreads across Zone IIA . cuts across the Zone IIA, River Basins- cal spread from the centre to the south and Zone IIB and touches the Zone I III towards the north. towards the south Zambia . More specifically the basin is . It covers the Zambezi spread over the Copperbelt mining flood plain and the Sioma zone and the Chama Lundazi Rice plains. The sioma plain is a There are two main river basins in Zambia zone in the north, Mufumbwe – cropping (maize and namely the Zambezi and the Congo River Kasampa Zone and central maize- cassava) and cattle-rearing cotton belt in the middle and the Line zone Basins. of Rail commercial zone in the south. Population . Almost 50% of Zambia’s population . sparsely populated with Barotse and Kafue sub basins are major sub density is concentrated in this basin. low productivity crops, and basins of the Zambezi River with a total . Almost 50% of the total Zambian sustenance based agriculture crop production takes place in this 2 catchment area of 115,753km and area. 155,805km2 respectively, constituting 20% of Economy Plays a central role in Zambia's . Households grow maize, Zambia's total land area and are most economy with concentration of most of rice and sorghum and keep the mining, industrial and agricultural cattle and pigs Locationexposed of Kafue to climate and Barotseextremes. River Sub-Basins activities. . The area is dissected by . The northern part of the basin is the Zambezi River, offering highly urbanised, with wage opportunities for fishing and employment in mining, manufacturing, water transport banking and trading sectors being the . The sioma plain is a main livelihood options for most cropping (maize and people cassava) and cattle-rearing . Mufumbwe –Kasampa Zone and zone central maize-cotton belt the zone is self-sufficient in food production . Northeastern parts of the territory is characterised by commercial production of maize, cotton, tobacco, sugarcane and grain legumes. Natural . The central zone is not prone to . The Zambezi flood plain is Disaster drought as rainfall is normally a low-lying wetland that adequate floods yearly Source: . Northeastern parts is prone to http://www.ied.ethz.ch/newsletter/newsletter10/research livestock diseases and drought /ir Agriculture in Key features of Zambian agriculture Abundant arable land receiving 650mm of rainfall in the southern part of the country and Zambia 1800mm in the North each year. Only 4.5% of the total arable land is cultivated In Zambia agriculture The sector’s contribution to real GDP averaged 19% making up 39% of earnings from non-traditional exports while agricultural growth has been around 4% over the past three plays a key role of years. generating employment Cultivable land is asymmetrically distributed with approx 70% of the growers having land holding of less than 2 ha per household particularly in rural areas Agriculture production and income is highly asymmetric with 50% of the commercial production coming from less than 5% of growers
Agriculture is the Key Smallholder agriculture is characterized by a general inadequate productivity due to driver for the economy Weak technical and commercial skills of smallholders; Poor knowledge of improved low-input farming techniques; due to its high potential Labour constraints; Poorly functioning input and output markets; High costs of transport; and Lack of support services. Agriculture Calendar
Planting is done from November to December, however early planting (October) is practiced in parts of the country especially the north.
The main harvesting takes place from April to June for all rain‐fed crops except cassava, which is harvested all year round.
The green (early) harvest takes place between February and March, which characterizes the end of seasonal hunger period. Agriculture in Zambia
Farm holding & Income Pattern
Three major categories of farmers in Zambia* The major source of income for the Low-Road takers is
Characteristics Minor income source: Casual labour, Type of Farmers Land Other Assets Crops Grown (contributes 35-40% of total income) holding Minor income source: Livestock The ‘No-Road’ negligible farm (chickens and goats)and crop sales takers to Grow maize for small land assets, 1-2 Agriculture sustenance Other sources: petty trade, crafts and holders (0-2 cattle per prosperity (approx Occasional surplus for crop sales Ha) house hold 70% of the sale on local markets (HH), growers) Middle households earn most of Along with food crop their income from they Also grow Cotton, The ‘Low-Road’ paprika, other cash crop livestock, crop and charcoal sales. takers to assisted by out-growers Agriculture 5-6 cattle per Income from livestock and fishing 2-6 Low margin but contributes to almost 50-60% of the prosperity (approx HH disciplined cultivation household income in the western flood 25% of the Profits gradually plains whereas it contributes to only growers) ploughed into 30-40% of the household income in horticulture the central provinces. Grow high investment, The ‘High-Road’ high margin crops. takers to 10-12 cattle per Horticulture growers Agriculture >6 HH Also grow maize to Prosperity (approx capitalize on govt 5% of the growers) subsidy * As identified from the IAPRI (working paper 64) Agriculture in Zambia
Major Crops in Zambia
Maize and Cassava are major Staple crops in Zambia
Maize serves as the principal food staple in central, southern and Expected Production of major crops in 2012 eastern Zambia and supplies about 60% of national calories, while Wheat Millet Cassava is important in northern and western Zambia (FAO, 2002) Rice Sweet Potatoes Sunflower Sorghum Commercial cotton spreads out across the semi-arid central and Other Soyabeans southern parts of Zambia but mostly concentrated in eastern Zambia. Mixed Beans Commercial horticulture in close proximity to major urban centres and Groundnuts along major transport routes leading to them. Seed Cotton Maize Major staple maize, cassava, Groundnut, sorghum, rice crops and millet. Cassava Major cash crops cotton, soya, sugarcane, peanuts, and tobacco.
Geographic distribution of Maize, Cotton and Horticulture Sales Wheat Area under major crops, 2012 Sunflower Millet Sorghum Rice Other Sweet Potatoes Soyabeans
Mixed Beans Groundnuts Maize Seed Cotton
Cassava
Source: Ministry of Agriculture and Livestock, Central Statistical Office (CSO) Agriculture in Zambia
Major Crops in Kafue & Barotse
Production of Major Crops -KAFUE Kafue forms part of the central and Northern provinces. Part of the region comes under the AEZ IIA and part 0% 1% 1% 4% under AEZ III. Barotse on the other hand mainly forms 4% Maize part of AEZ IIB also called the western flood plains. 5% Cassava Soyabeans Our calculations show that the percentage of cultivated 8% Seed Cotton land to the total available arable land in Barotse is lower 4% Sweet Potatoes than the national average i.e. 4.5% but in in the Kafue Groundnuts region, it is higher than the national average. 73% Rice Maize is the main staple crop in Kafue region, Virginia Tobacco which has substantial acreages under cash crops Others such as Cotton, Groundnut and Soy. In Barotse Cassava and Maize are the main staple crops with negligible acreages under cash crops Production of Major Crop- BAROTSE 1% 2% 0% 1% 0% Zone wise cultivated area under major crops Maize 0% 16% Cassava AEZs (Cultivated area in ha (approx)) 0% Major Crops Soyabeans AEZ I AEZ IIA AEZ III AEZ II B Seed Cotton Maize 100,000 700,000 304,923 90,000 Sweet Potatoes seed cotton 23,253 279,710 Negligible Negligible Groundnuts Soyabean, Rice 15,576 86,180 9,320 5000 80% groundnut Virginia Tobacco Others Cassava 538 15,935 313,588 48000 TOTAL 1,39,367 1,081,825 6,27,831 1,43,000
Source: Ministry of Agriculture and Livestock, Central Statistical Office Source: Ministry of Ag, Zambia (CSO) Agriculture in Zambia
Major Crops in Kafue & Barotse
Maize Province-wise expected Production of Maize in 2012 in Mt*
Maize is the principal staple food in Zambia. The Zambian "maize belt" consists of agro- ecological Zone 2 (medium rainfall and high altitude) and parts of Zone 3 (high rainfall and high altitude).
Maize is grown in the rainy season, from November to April. It is also grown in the dry season where irrigation facilities are available.
Maize receives intensive government input and marketing support
Maize is a low-value, high-input crop. For that
reason, poor farmers are rarely able to launch *Source: CSO 2011/2012 Crop Forecasting Survey (by Ministry of Agriculture & Livestock and commercial farming careers as maize farmers. the Central Statistical Office)
Well-off rural households, who can afford to pay high mineral fertilizer and seed prices, are able to consider commercial maize production.
Maize Cultivation in Subbasins:
In kafue and Barotse sub-Basin area almost all the farmers are involved in maize cultivation.
Southern and Central Province fall under Kafue region which are among the high producers of maize, whereas only some part of southern province come under Barotse and most of the area fall under Western province, least producer of Maize. Agriculture in Zambia
Major Crops in Kafue & Barotse
Seed Cotton Province-wise expected Production of Seed Cotton in 2012 in Mt
Cotton is one of the important cash crops of Zambia.
Cotton production is heavily concentrated in Eastern province.
over one-third of smallholders from this area involve in cotton farming.
Contribute about two third of total production ((60%, expected production 2011/12, as per CSO 2011/2012 Crop Forecasting Survey) )
Central and Southern provinces trailed far behind
at 20 percent and 12 percent respectively. Source: CSO 2011/2012 Crop Forecasting Survey Almost all of the cotton grown in Zambia under Main cotton production zones the out-grower schemes offered by Companies; such as Company A and Company C.
Seed Cotton Cultivation in Subbasins:
Cotton production is significant in only some of the areas of Southern and Central Province falling under Kafue Region. In Kafue around 23% farmers are involved in Seed cotton cultivation and produce 25% of Zambia’s total Seed cotton production.
Source: http://www.worldbank.org/afr/wps/WPS_124_Zambia_Cotton_Study.pdf Agriculture in Zambia
Major Crops in Kafue & Barotse
Horticulture
Horticulture markets remain the province of independent private traders and farmers.
Currently, a large network of farmers, private input dealers, wholesale traders, and private retailers manage Zambia’s horticulture trade.
They concentrate primarily in central Zambia and in the Copperbelt, in close proximity to the urban markets along the railroads.
The main horticultural crops produced by smallholders are tomatoes and brassicas (cabbage, rape)
Tomato, rape, and cabbage – account for about 75% of smallholder sales of horticulture products. Tomato Farm in Kaleya Village of Mazabuka Town
Cabbage farm visited during FGD with farmers in Kaleya Village of Mazabuka Town Cabbage grown in the field (Kaleya Village of Mazabuka Town) Agriculture in Zambia
Livestock in Kafue & Barotse
Livestock Production of major livestock is Kafue and Barotse are the major livestock producing concentrated in the 4 provinces of Zambia regions in the country Central, Communities in Kafue and Barotse regions are largely Southern, dependent on livestock as a source of livelihood, food and draught power (Zambia National Adaptation North Western and Programme of Action, September 2007) Western Provinces Livestock situation has changed in recent years, due to Cattle contributing at least 60% share of disease, drought and forced selling by households to meet increasing cash needs. This loss has affected the major livestock in Zambia. The other major household food consumption pattern as well as livestock include sheep (9%) goats (15%) agriculture production practices. and pigs (14%). ZAMBIA has huge opportunities in livestock, most particularly in beef production and export Livestock in Zambia-2012 pigs 14%
goats 16%
Cattle 61%
sheep 9%
Source: Ministry of Livestock and Fisheries Livestock in Kafue & Barotse Importance of Livestock Rearing in Zambia Animal farming has a huge potential and economical value in Zambia considering widespread Poverty and food insecurity Small farmers can gain access to additional year round income from the production of milk and meat Livestock sale is a considerable source of income for middle and larger growers (the low and High Road takers) Constraints to Livestock Production Shortage of feed: This is particularly the case in the dry season and during recurrent droughts. Drought situation is more critical in low rainfall areas, particularly the southern parts of the country falling in Zone I (Barotse region). Livestock Diseases: Southern Province due to the “corridor disease" the decline in the cattle population has resulted in a substantial loss of income and draught power to a large number of small-scale farmers. Flood: It is reported that during floods the wild animals from the inundated forests and game reserves migrate to the nearby high altitude areas where they infect domestic livestock with diseases.
Nature of Climate Change and Weather volatility, and impact on agriculture- Historical weather pattern
Zambia weather Patterns - 1960-2003* Weather Patterns - 2000 to 2007
Mean annual temperature has increased by The intensity and frequency of droughts and 1.3 deg C since 1960, with an average rate of floods and the number of people affected has 0.29 deg C per decade increased
The number of hot days and hot nights per Floods have been occurring once every 2.3 year has increased by 43 days, with the most years and droughts once every 5 years, pronounced increases between March-May intensifying to once every three years in (hot days) and December-February (hot recent years (1991-2011). nights). Droughts have also been occurring within The average number of cold days and nights rainy seasons, such as in 2000/01, 2001/02, per year has decreased by 22 and 35 days, and 2004/05. respectively. Mean rainfall has decreased by 1.9 Moreover, the area affected by floods and mm/month (2.3% per decade) droughts appears to have expanded In sum, rainfall seasons in southern Zambia (The 2006/07 flood, for example, affected 41 have become less predictable and shorter districts in nine provinces, and the 2004/05 (most notably in the southwestern area), with drought left nearly two thirds of Zambia with rainfall falling in fewer, more intense events. little or no rainfall.) * PPCR reports on strategic program for climate initiatives, Zambia Nature of Climate Change and Weather volatility, and impact on agriculture- Projected weather pattern
Projected climate trends in Zambia The projected changes in precipitation variability could lead to Precipitation more intense floods and longer and more severe droughts. Simulated • Precipitation variability is expected to increase from -3% to changes to the probability of exceeding +3% by 2100 flood thresholds – defined as a 15% • During the early rainy season (October-December), deviation from normal rainfall for the precipitation levels are projected to decline – equivalent to rainy season – indicates that floods three months out of the 7-months rainy season becoming are expected to continue to occur drier. frequently in the future • By contrast, the proportion of rainfall resulting from heavy events is projected to increase, particularly during The rising temperatures are December to May expected to further increase the outbreak of plant and livestock diseases. River Flow an increase in mean temperatures • There is a net positive change (about +11%) in Kafue River during November-December and a flows reduction in mean precipitation during January-February would impact negatively net farm revenues, whereas Temperature the impact would be positive for • Projected increases in average annual temperature are 3-5 increases in mean temperature during deg c for Zambia and 3-6 deg c for Kafue Basin by 2100. the growing season (January-February) and an increase in mean annual runoff. • By 2060, models indicate temperature increases of 1.2-3.4 deg C • By 2060, the number of hot days and nights are projected Overall increase in weather volatility to increase significantly throughout the country, by 15-29% will impact farming practices and risk and 26-54%, respectively management methodologies.
Source: documented in the NAPA Agricultural Risks and Coping Mechanisms-As per the Zambia Vulnerability Assessment Committee (ZVAC)
The most common hazards Strategies by which households tried The most common hazards in the flood prone zones i.e. much to avert the effects of hazards of Barotse and the southwestern part of Kafue river basin include flood, drought and cattle diseases such as CBPP. • Maximizing income: sale of livestock, , increased sale of timber, labour migration to other districts Excessive flooding in February through May • Minimizing expenditure: reduction of non- damages crops, destroys infrastructure and essential expenditure. Households reported results in livestock and human diseases Flood reducing expenditure on clothes, relish and other When there is excessive flooding, some areas non-staple items in bad years. become inaccessible by road making it difficult to • Shifting consumption patterns: collection of wild reach those in need of assistance. foods and increased fishing A poor start to the rains causes delayed planting, Delayed whilst prolonged dry spells during the peak rainfall/ rainfall months (December – February) results in prolonged reduced crop yields due to moisture stress. dry spells The northern and central parts of Kafue are more exposed to rainfall volatility related risks A key difference between successful commercial The main chronic hazard experienced in the smallholders and those who attempt but fail is the Kafue and Barotse basin is cattle disease Cattle discipline to build up financial reserves. (particularly Contagious Bovine Pleuro Disease Pneumonia or CBPP). This reduces livestock Poor households cannot cope with the effect of disasters, despite numbers and productivity every year. employing numerous response strategies This highlights how fragile the ecosystem is if people continue to depend on the same food and income sources without improving farming methods, market structure, infrastructure and above all the huge dependency of the poor on forest products
Farmers’ Approach to Commercial smallholders prepare to face inevitable but weather hazards – unpredictable shocks by building up financial reserves and livestock Socio-economic status assets, both of which provide savings that enable farmers to resume wise commercial farming following a catastrophic season.
Horticulture farmers, who travel frequently to town for marketing, often secure their funds in commercial bank accounts. Agricultural Risks and Coping Mechanisms-As per the Inputs from the FGDs and Household Interviews conducted in Kafue and Barotse
Two thirds of farmers consider Weather related catastrophic disasters affecting agriculture and livestock weather-related disasters responsible for total loss of Region Worst livestock related Crop related catastrophic event since crops and in particular. For catastrophic event ever 2000 example, Barotse CBPP (cattle disease) killing -2002 drought combined with hailstorm A. Kafue is particularly affected cattle in large numbers -Low rainfall of the last 2 years (2010-12) by lack of rain, floods and -Several floods 2009-2011 droughts; -2010 cold weather affecting cassava, cashew nuts and mango yields B. almost half of the farmers have Kafue -Corridor disease (2010- - Floods: 2009, 2011 indicated pest attack on 2011) - Draught: 2002, 2011 livestock a disastrous event.
Farmer’s Coping Mechanisms Ex-ante risk management mechanisms Ex-post coping mechanisms
1. Crop diversification: from maize to cash crops (cassava, cotton) 1. Selling their livestock and/or drought resistant crops (groundnuts, soybeans, sweet 2. Borrowing money, usually through informal potato and sunflower) sources, at very high interest rates 2. Inter-cropping: in Kafue farmers like to mix maize fields with beans 3. Offering daily labour using a certain distribution pattern 4. Selling charcoal , selling burnt wood, burning fields 3. Using early maturing seeds etc. 4. Conservation agriculture 5. Gardening: (i.e., watermelon and pumpkin , other fruits and vegetable) 6. Small Livestock as savings: Chicken rearing , Gottery 7. Off-farm activities: Business set up with the support of soft loans. Agricultural Risks and Coping Mechanisms-As per the Inputs from the FGDs and Household Interviews conducted in Kafue and Barotse
Risk management measures in sub basins
Region Preventive measures Short term responses to shock Long term responses to shock
Kafue .Cotton and banana production .Selling of livestock (cattle and goats) .Gardening .Use of different maize seed (GV412) .Gardening .Applying for government food .Early maturing seed .Winter-maize to sell for some extra income rations (distributed in Nov. and .Rearing of goats. .Work at the Zambeef Company Dec) .Crop diversification .Collection of wild food and berries in case .Gardening near the river of food shortage .Government food rations .Borrowed money to do some business .Part-time work for cash .Crushing stones Barotse .Crop diversification (but with little .Off farm labour: construction, fishing, .Complaints to administration knowledge and poor assistance from carpentry officials Govt) .Irrigation .Irrigation project funded by .Early maturing varieties so that .Unblocking of irrigation canals from sand Japanese Govt harvest happens before the regular .Overhead irrigation for maize (but this .Continuing unblocking of floods to the area require cash investment so only few irrigation canals, but regularity of .Request for “soft loans” easy to get adopted it) labour has proven difficult without collaterals .Level land for rice labour (but this require .Early planting .Careful schedule of planting cash investment so only few adopted it) Issues related to agriculture risk management-As per the Inputs from the FGDs and Household Interviews conducted in Kafue and Barotse
Farmers lack know-how and consider risks of Barriers to produce drought resistant crops: embracing new crops are too high Sunflower and Soybean
Some farmers consider risky to engage in crops that For Soyabean large quantities of product are needed are not used for consumption, as they tend to not to create critical marketable amounts. separate production for consumption from production Hence production of soybeans for small holders is for markets; through they are provided training and still not so accessible and perhaps not viable assistance from extension services or inputs distributors or they are part of cooperatives, clubs Furthermore, they need to find ways to aggregate and farmers union programs supply as there is still not a system in place to transport produce to the buyer or there are no They need loans to invest in new seeds and new market outlets available. techniques, but affordable loan programs are not so accessible
Knowledge of and attitudes towards weather insurance programmes
Farmers know only about life and motor insurance
The concept of WII was explained for the first time during the data collection for the survey and the focus groups
Generally, the farmers wished the premium to be included as part of the loan from the micro finance institutions. In few cases, farmers were willing to pay an amount equivalent to one chicken approx $ 1-2 as premium for insurance products to cover their crops.
Available weather Location of meteorological monitoring stations in infrastructure Zambia
41 multi parameter meteorological stations installed by ZMD 5 automatic weather stations from COMESA, funded by the European Union, 8 meteorological stations installed by UNDP 300 volunteer stations (rain Available weather monitoring infrastructure gauges) owned independently ZMD has 41 multi parameter meteorological stations (39 manual stations and 2 automatic weather stations)
Data availability The automatic weather stations are currently not operational due to Accessing historic data in Zambia is some minor repairs needed. difficult, as the ZMD would normally None of these 41 stations has autographic equipment to give not give out more than 5 years data continuous data for any one station unless there is a special arrangement with the ZMD In 2012, the department received additional 5 automatic weather stations from COMESA, funded by the European Union, but these We could get decadal rainfall data for about 31 locations from the stations are not yet installed due to shortage of funds to facilitate the ministry of agriculture. exercise.
There is no crop cutting experiment The UNDP has recently installed eight meteorological stations as part based formal crop yield estimation of its climate change management initiatives system in Zambia. There are also 300 volunteer stations (rain gauges), registered with Met but owned independently. Many of these stations are currently not in operation because they lack measuring glasses. Weather Estimation of weather parameters using satellite monitoring observations. E.g. the NASA TRMM ( Tropical Rainfall through satellite Measurement Mission) observations TRMM fills many gaps in our understanding of rainfall properties and their variation. These includes: Most of the satellite Frequency distributions of rainfall intensity and areal coverage; estimates are applicable for The partitioning of rainfall into convective and stratiform categories; a geographical area of 1 The vertical distribution of hydrometeors (including the structure deg by 1 degree i.e. 100 and intensity of the stratiform region bright band); and Kms by 100 Kms. Rainfall Variation of the timing of heaviest rainfall - particularly nocturnal variability is too high and intensification of large meso-scale convective systems over the estimates at these oceans, and diurnal intensification of orographically and sea- resolutions are not useful to breezed forced systems over land. capture the variations in TRMM also enables mapping of larger time and space weather at the farm level. variations of rainfall in quasi-periodic circulation anomalies, The satellite data can be such as the Madden-Julian oscillation in the western Pacific used for settling meso-scale and ENSO over the broader Pacific basin. catastrophic insurance The critical onset of large annual circulation regimes, such as covers e.g. govt. sponsored the Asian summer monsoon, can be more thoroughly studied. flood covers in Barotse, The TRMM data sets at a resolution of after calibrating it with 1degree by 1degree actual ground observations. are available since 1997 for the tropical regions. The NMC (National Meteorological Center, US) reanalysis However, for the mainstream market driven data is also useful to estimate weather parameters crop specific index Reanalysis data sets for the whole globe at a resolution of 1 insurance products a degree by 1 degree are available since 1979 denser network of ground weather stations is required. Requirement of Weather Monitoring Stations
Total land area of 1,50,000 sq km As per WMO, The optimum number of rain gauge the two basins- stations that should exist in order that the mean rainfall can be estimated with an assigned Available Weather 42 non-automated stations percentage of error is given by Stations- in the whole of Zambia
Assessment of no. of stations to be installed based on WMO guidelines and FGD with the farmers
Rainfall gauge is required:
For flat regions- for every 500-900 sq km (one every 25to 30 km)
For hill/mountainous regions of temperate, Mediterranean and tropical zones- for every 100-250 sq km ( one every 10 to 15 km) If we have to settle contracts on fortnightly rainfall In the Focused Group Discussions we conducted, the for which Cv is even higher, the number of rain farmers suggest that they would like to have stations not gauges required comes to approx 400-500 far than 20 km from their fields i.e. 1 station every 400 sq km. Density of humidity stations required in certain regions could be higher than what has been Total land area of the two basins i.e. 1, 50,000 sq km, estimated for capturing rain. hence the two basins will require approx 160 to 300 automatic weather stations each Northern part of Zambia is hilly and the density of stations required will be higher. Assuming the acceptable degree of error is 5%, the number of stations required to estimate mean rainfall should be approx 100 to 400 for each of the regions, depending on the nature of the index insurance contracts required i.e. monthly or seasonal. Support infrastructure for weather station networks
Component Description
Trained staff for repair One person can handle approx 20 and maintenance stations installed within 60km radius of his/her base Warehouse Architecture Small stores (200 sq foot area) available with each maintenance staff A larger warehouse (500 sq foot) will be needed at a central location
A computer server with proper power and storage back up to receive data from the main stations
Two persons trained in will be required to maintain the server system administration and weather database and database management
We estimate that the maintenance cost per station per annum will be approx $ 500 per station. The capital expenditure per station is approx $ 2000
Scope for Index Relevance of Index Insurance to different type of farmers based on Insurance in landholding Zambia Grower Segments Features Relevance of Index Insurance The ‘No-Road ‘ takers Low productivity, small land Farmers are highly dependent on Whom to cover and Why? to Agriculture holders ( 0 – 2ha cultivated rain-fed farming. Their livestock also prosperity (approx land) , trapped in deep poverty, get affected in case of floods and From pure commercial point of view, 70% of the growers) grow maize for sustenance, prolonged drought, Insurance all the three segments should be negligible farm assets, 1-2 cattle against abnormal rainfall helps them targeted simultaneously to make index per household (HH) in securing food. However, they insurance viable for insurance cannot afford the insurance companies as then the weather- premium and they do not have any monitoring infrastructure established in bank accounts also. Institutional an area can be better utilized. outreach (other than the FRA, FISP) to this segment is poor. However, the demand drivers for The ‘Low-Road’ takers Cotton, paprika growers Index insurance should be an sales in each of the three segments are to Agriculture assisted by out-growers, low integral part of the out grower different and business plans for the prosperity (approx margin but disciplined schemes as it helps both the respective segments to be prepared 25% of the growers) cultivation. Profits gradually farmers and the procuring company. accordingly. ploughed into horticulture, 5-6 Cotton farming is heavily dependent The demand driver for all three cattle per HH, 2 to 7 ha of on weather. Out-growers need segments: cultivated land) insurance for better credit terms and also to retain farmers in case No-Road takers : govt’s ability and of catastrophes willingness to pay on behalf of these The ‘High-Road’ takers High investment, high margin High value horticulture growers are small growers to Agriculture horticulture growers. Also grow exposed to weather related risks. Low-Road takers: through the credit Prosperity ( approx 5% maize to capitalize on govt They maintain high level of cash as and out-grower model of the growers) subsidy, 10-12 cattle per HH, >7 buffer to protect themselves against ha of cultivated land weather related shocks. Index High-Road takers incorporate features insurance is highly relevant for them of index insurance by Insurers in their existing product
Scope for Index Segment Product Factors to be considered Insurance in No-Road Non-crop specific products Rainfall in the catchment area, takers e.g. drought , flood index river water flow and the Zambia products used by any kind landscape of grower The river flow data is available What kinds of covers are with the Zambezi river authority. required? Low-Road crop specific index crop diversification and local Index Insurance cannot specifically takers insurance products for coping mechanisms adopted by cover livestock diseases credit-out-grower linked the growers, local geographical as these diseases may also occur farmers terrain, local risk mitigation on account of non weather based strategies reasons Crops that need to covered some of these diseases are are Maize, Cassava Cotton, Standard agro-meteorological influenced by weather related events Groundnut, Soya and other charts prepared by the such as floods/ extended droughts horticulture crops department of Agriculture (DAA) Flood/drought based index products are available which can be used can be taken as reinsurance by govt’s to understand the adverse livestock department who provides weather event thresholds relief to livestock growers in case of according to crop varieties epidemics when large scale floods or High-Road Blended products ( hybrid droughts occur. takers between MPCI and Index Also the safety net products may Insurance) will be required compensate the losses to livestocks which can offer merits of due to floods, extensive drought or both the MPCI i.e. high weather induced diseases. actual loss to claim congruency and index insurance i.e. faster and bias-free claim settlement.
The low productive zones and sparsely cultivated areas can be covered under the security net framework through govt-sponsored schemes. In such schemes, claims can be settled using images from satellites. Settlement using satellite images warrants that simple drought (seasonal)/flood based products be designed
The segment wise sales and distribution approach for IBWI
Segment Sales & Distribution Strategy Is it an attractive proposition for insurers No-Road Takers (0- 2 Govt. sponsored index insurance through Premium potential in the order of US$ 5-mn. ha) FRA, FISP. ( At least 30% of the small Insurance may be given along with the fertilizer- growers do business transactions with seed kits (for maximum 2 kits, so that large FRA and FISP) growers do not benefit unduly from the subsidy) Low-Road Takers (2- Integrate with out-grower cotton schemes. Premium potential in the order of US $ 2 mn. 10 ha) Insurance companies can also appoint Bulk of the premium is concentrated in Kafue traders, dealers as their agents to reach to region and Eastern provinces – so weather these customers monitoring stations are required in a limited Integrate with Maize-Soya rotation region programs proposed by PPCR groups Mobile phones available with outgrowing companies, so can be used to register or service the customers (claim information) Company C and Company A reach almost all cotton growers High-Road takers Insurance companies can identify the large Premium in the order of US $ 5-10 mn. Bulk of (> 10 ha) growers and appoint traders, dealers as the premium from Kafue their agents to reach to these customers. Can club index insurance with Bank loans as well, as most farmers in this segment have access to bank loans Learning from MicroEnsure’s marketing and distribution model in Africa
Access to finance has for long been identified as one of the main challenges the small holder farmers face in Africa. Smallholders are frequently unable to access financial services as banks / Financial institutions are reluctant to lend money due to the potential for default due to crop failure Insurance against such risks facilitates access to credit for smallholders This allows them to purchase improved farm inputs such as high quality seeds and appropriate fertilizers, therefore improving crop yields, food security and the development of the rural economy. MicroEnsure works closely with financial institutions that are willing to give credit to the farmers and provides the insurance.
MicroEnsure’s marketing and distribution model in Africa Index Insurance value chain
Farmers’ associations
Bank/ MFIs
Insurance Insurance agents
Clients Reinsurance Third party agencies, regulatory bodies
Input providers Insurance
Other govt. Institutions
Role of different institutions in a vibrant index insurance ecosystem in Zambia
Institutions How to engage them and create a vibrant Ecosystem for Index Insurance Various institutions will Insurance companies Insurance Cos. can Include index insurance covers as part need to be engaged to of their standard Crop Insurance (MPCI, including Fire build a vibrant index and theft) schemes. Assist them to design and market insurance ecosystem these products to their existing customer base Provide index insurance covers for small growers ( to reduce administrative costs) Govt Provide index insurance for small growers as safety net Improve the weather monitoring infrastructure Mobile money transfer Access to FRA/FISP outreach system, which is common Out-growers/Banks Design products according to their requirements, which elsewhere in Africa, are just can be integrated with their schemes (to work with now emerging in rural Company C, Company A). Make them tie up with Insurers Zambia. Distributors Agencies who can work on behalf of insurance Where formal savings companies to reach out to commercial growers (Low- institutions are unavailable, High-Road takers). Zambia has a good ecosystem of input farmers keep a cash reserve dealers traders and procurers who are reaching out to in a special hiding Place in commercial farmers their house, separate from Data Providers Identify agencies who can install a network of weather normal transactional cash stations and/or gather data from satellites to supply data for claim settlement to insurers. These need to work in tandem with the Zambian Met Agency. Need to check investment viability Supply side Bottlenecks
To make such a large weather station network viable one should be generating approx. $12000 premium per station to achieve a break even within three to four years.
To achieve the break even one will have to cover 0.6% of the land under index insurance to achieve breakeven.
In Zambia the total cultivable to total land ratio is about 4.5% and even Achieving the break lower in certain areas ( e.g. Barotse and the Western Flood Plains of even for installing Zambia), a significant percentage of the grower population needs to be large weather covered (roughly 15%) under index insurance. station network Only approx. 20-25% of the farming population i.e. the low and High-Road takers are bankable and can afford to pay the index insurance premiums;
To achieve breakeven, one has to ensure that almost all growers in the low and High-Road category purchase index insurance.
there will be initial challenges in product design and claim settlements, that will need time to resolve. Therefore, it will be difficult to recover weather stations costs through index insurance alone in the short term.
This data reconstruction exercise for new weather stations will be difficult to Not all of new accomplish in Zambia where the new stations may not follow patterns of the stations can be used historical stations. immediately for As from the available 42 historical reference stations against the required number of 800 to 1850, only 29 stations have reasonable quality data, which may be settlement of index inadequate to represent the weather variations across Zambia.
insurance contracts This data reconstruction exercise for new weather stations may take 2-3 years or even more and so new stations can be used for settlement of contracts only gradually. Supply side Bottlenecks
Agricultural production is geographically concentrated in specific regions
Approx. 60% of all agricultural production and approx. 80% of cash crop production takes place in the central and Eastern provinces. Agricultural The chances to recover weather stations costs is higher in high producing production is territories (central and Eastern provinces) compared to the sparsely geographically populated and lower productive zones (western flood plains ) concentrated in For the sparsely cultivated non-commercial zones, index insurance based on automatic weather stations may not be viable unless supported through specific regions grants or govt support. In such regions, settlements through satellite imagery can be a better option
new types of indices that can be assessed remotely with satellites, such as Writing of contracts cloud cover or soil moisture content or even “evapotranspiration” readings based on satellites for a chosen region during critical agricultural periods
for individuals is people may not trust payout decisions made by insurers on the basis of constrained by a such remote sensed and therefore ‘unseen’ data that may, because of basis credibility problem risk, fail to correlate highly with their own on-the-ground observations.
Models on flood occurrence based on rainfall in the river basins and river water Establishing model for flow will need to be developed and tested for a few seasons flood occurrence will Establishing flood occurrence based on satellite images in absence of updated be difficult digital elevation maps will be difficult At places flood occurrence may have to be established using water depth sensors The following are problems insurance companies may face regarding reinsurance capacity for index Reinsurance insurance The insurers do not have In the absence of sufficient interest, reinsurance quotes the technical capacity are likely to be higher than the norms in a competitive and reinsurance market arrangements to Many of the settlement stations will be new with insufficient historical records. Contracts on such stations underwrite index may not find sufficient takers in the reinsurance market insurance contracts The reinsurance quotes by one or two reinsurers may be on the higher side, which may overprice the contract The reinsurance support for small projects is also minimal
Investment Scope for IFC – SPCR
IFC can play a role in addressing the supply side bottlenecks. In this process it can also achieve other PPCR objectives Weather Monitoring Infrastructure Reinsurance Fund
Achieving a break even within 4-5 years on the IFC can create a fund that can be drawn required investment of approx $ 1.5 mn for installing upon by a consortium of Insurance about 600 weather stations to cover the entire Kafue companies for reinsuring index insurance and Barotse region may not be realistic. IFC can contracts support IBWI in following ways The technical support to this fund can be Providing soft credit to third party administrators provided through the IFC -GIIF facility for purchasing and installing weather stations. The Reinsurance fund can work through a In order to incentivize third party administrators captive formed in collaboration with a rated at-least 30-40% of the capital expenditure needs reinsurance company. The captive can be a to be covered through grants or government joint venture in which IFC can take equity or subsidy. provide financial assistance
Part investment (30-40% of the required capital To cover premiums lesser than $ 100,000; expenditure) may come from the local assuming that each contract is priced at 8- government, the World Bank or other multi-lateral 10% of the covered amount, a fund to the agencies such as the Swiss Development Co- tune of $ 1.2 -2.5 mn will be sufficient operation (SDC) and the COMESA
In absence of a grant or government support for the stations, the third party service providers may cover select pockets in the two basins and prune their operations to remain profitable Captive arrangement
The advantage of a captive arrangement is that : Through it competent professionals can work with focus on building index insurance market in Zambia utilizing the rating and expertise of Reinsurance Company. The captive can in turn reinsure its portfolio with other reinsurers. There is no extra tax burden if we take the captive route. Through this IFC can serve the requirement of index insurance growth in other markets as well.
Rated Re-insurance Company
Reinsurance IFC Captive
Insurance Cos. to cede premiums and get claims
Insurance Cos. Insurance Cos. Insurance Cos. Functioning of a typical captive reinsurance situation
What to do to recover investments fast?
• To make index insurance viable for insurance companies, All the three segments should be targeted • This way the weather-monitoring infrastructure and the sales force set up in an area can be better utilized
Focus on small and medium farmer • As the premiums are absorbed within the input credit, oriented credit and out-grower model insurance is easily accepted by the growers
Govt’s ability and willingness to pay • The govt inclination to pay on behalf of farmer will be high if on behalf of the small growers the compensation is fair and equitably distributed
• a single person could manage more number of stations Reduced AWS maintenance costs within a single trip • this way, stations can be installed at a lower cost
Index insurance can meet environmental protection cause best, • E.g., water-harvesting structures reduce requirements of by taking into account the rain and this should be reflected in the index insurance environmental practices in the product product design and premiums. design and premium calculations Risks
Basis Risk •Basis risk can be reduced by increasing the number and distribution of weather stations in order to better capture spatial variation in climatic conditions when writing contracts •There is also interest in new types of indices that can be assessed remotely with satellites, such as cloud cover or soil moisture content or even “evapotranspiration” readings for a chosen region during critical agricultural periods Limited Local Insurer’s Capacity to Handle Weather Index Insurance Contracts •Insurance companies are usually not prepared to design index insurance products for agriculture •The adoption of creative solutions such as the ones mentioned above (e.g. remote sensed data based indices) could be quite useful •Significant support and training to design index insurance contracts Institutional Risks •In Zambia where the MET agency has been neglected by Government and central funding •MET services often perceive their role as scientific and as weather forecasters rather than service provider for the public and private sectors •This risk can be mitigated by providing financial and technical assistance to the MET department (ZMD). While the ZMD should be involved in the capacity expansion process Market Risks •Achieving a break even within 4-5 years on the required investment of approx $ 1.5 mn for installing about 500 weather stations to cover the entire Kafue and Barotse region may not be realistic •Third party private service provider may have to cover 7-10% of the growers in both the regions to achieve a break even within 3-4 years, which is not realistic •In order to incentivize third party administrators at-least 30-40% of the capital expenditure needs to be covered through grants or government subsidy •Even alternate revenue streams from mobile phone based extension service program may not be much helpful Next Steps
IFC Need to work in the following directions
Provide financial support in the Should invite WII market makers IFC should advise the interested order of $ 1 mn to the interested who have been working in Africa, insurance companies such as agencies to work in coordination to work with the Insurance Company F, Company E, and with ZMD to expand the weather companies and facilitate the Company D to launch index monitoring infrastructure and growth of index insurance insurance products in develop and sell index based market. insurance products.
Should co-ordinate with other All working relationships with key multilateral institutions like the Work towards arranging a partners should be formalised by Swiss Development Co-operation reinsurance arrangement so that means of legally binding (SDC), UNDP, COMESA and ILO customized products at contracts and memorandums of for launch and scale up of Index competitive rates can be provided understanding (MOUs) Insurance Submitted By
Bhartiya Samruddhi Investments and Consulting Services Limited (BASICS Ltd.)
No.365, Upper Palace Orchards, 14th Cross, 5th Main Road, Sadashivanagar, Bengaluru -560 080, Karnataka, India Tel: (+91-080) 4132 0720 Fax: (+91-080) 2361 0700 Web: www.basix-consulting.com / www.basixindia.com
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