The role of microinsurance in the climate change fight

Jane Maweu, a dairy farmer from Makueni, Kenya a region frequently affected by perennial drought infront of her fodder bank that comes in handy during drought. Photo by Catherine Waking'a

Knowledge is a powerful weapon that can influence and educate people, specifically smallholder farmers, on micro-insurance. With the effects of climate change that expose farmers to economic losses leading to a possible food crisis, farmers need a form of protection. We Effect has partnered with financial service providers and insurance companies in East Africa to sensitize communities on micro-insurance value, develop affordable insurance, and establish effective distribution channels among partner organizations.

Shadrack Gor, Financial Inclusion Programme Officer at We Effect, specializing in promoting the uptake of microinsurance by the small-scale farmers within the We Effect programmes in East Africa – Kenya, Uganda, and Tanzania shares his perspective on the role of insurance in the climate change fight with the Standard newspaper in Kenya.

Climate change affects small-scale farmers economically and contributes substantially to food insecurity. They lose crops and animals through flooding, drought, pest, and disease manifestation. Insurance products are available to shield farmers against such adverse climatic effects and improve their resilience.

How are insurance executives, in your opinion, thinking about this differently now from what they might have had a couple of years ago?

About 8.6 million small-scale farmers in Kenya represent 4.5m households, according to the Agricultural sector Transformation and Growth strategy (2019-2029). Insurers are now focusing on these farmers because of this huge number. This is a new emerging market for microinsurance products.

Public-private Partnerships are also on the table. Insurers are considering working with Governments because of the government’s financial muscles to subsidize insurance products for small-scale farmers, for example, the Kenya Livestock Insurance Programme (KLP).

With the advent of climate change, traditional insurance models and, more broadly, past loss experience will not predict the future; how does the sector readjust?- Looking at innovation beginning to happen—for example, underwriting.

The insurance sector will need to adjust to meet the new loss dynamics, for example, losses associated with natural calamities. Insurers will have to develop insurance products that are easy to distribute and affordable to the farmers.

A notable innovation is the introduction of index-based insurances, which uses satellite imaging to determine compensation for the affected. The index-based insurance is available both for crops and livestock. This type of insurance distribution is efficient because no official physically visits the field for assessments. Examples could be the Kenya Livestock Insurance Programme covering the nomadic pastoralist in the North-Eastern part of the country.

Partnerships with Co-operatives are also an avenue for insurance distribution to farmers. Through Co-operatives, they can also get advances from the unions to pay for insurance premiums.

What kind of evolution are we likely to see in investment strategies or changes in the insurance response to cater to the Climate change risks?- what opportunities does climate change bring for the sector?

There is the issue with digitization. Insurers realize there is an opportunity to market insurance through mobile phone apps and USSD codes. This is the easiest way to reach small-scale farmers. The development of index-based agricultural insurance is also an opportunity for insurance companies to penetrate new markets.

Development organizations are also providing resources to fund the development of insurance products to protect farmers against climate change’s adverse effects, for example, the insu resilience solutions funds. This global partnership aims to enable more timely and reliable post-disaster response and to better prepare for climate and disaster risk through the use of climate and disaster risk finance and insurance solutions, increasing local adaptive capacity and strengthening local resilience.

With the effects of climate change that expose farmers to economic losses leading to a possible food crisis, how can insurance mitigate.

Effects of climate change include flooding, excessive drought, rise in temperature that leads to the thriving of pests and diseases. This leads to huge losses in crops and animals or very low productivity, affecting food security.

Insurance training can also be combined with sustainable farming methods to take up insurance. Farmers are also taught to practice proper agronomical practices that reduce food insecurity and less chance of climate change effects, which can later translate to lower premiums.

The majority of insurers shy off from insuring farmers due to the significant risk attributed to the sector’s unpredictable performance that leads to losses; how can insurers navigate this risk, cover the agricultural sector and still make profits?

Insurers have a duty to combine insurance sensitization with training on climate-smart agriculture, work closely with agronomist’s climate change experts, and involve farmers in product development. Early warning systems should also be developed through such joint initiatives.

Farmers are encouraged to practice modern farming methods resilient to climate change, and insurance should back up these practices. Through sensitizations, farmers will plant more resistant crop varieties and reduce risk risks; hence viable business ventures attract more insurers due to reduced risks.

Do we have good policies to guide the industry? If not, how has deficiency in policy and political will impacted in development of insurance intake among climate risk businesses

The Microinsurance Policy Paper maps out the future path for the regulation and supervision of the microinsurance business in Kenya. However, it doesn’t talk about index-based insurance, which is the future of providing agricultural insurance in Kenya.

There is a need for proper legislation on how index-based insurance will be administered in the country, as this is not discussed in the policy.

In the Insurance Act Cap 487, microinsurance is regulated under a miscellaneous class of business. This means that microinsurance is regulated under the conventional insurance law, which does not adequately provide for the insurance needs of low-income households.

However, for the sensitization of insurance, the policy paper has a plus. It states that the Insurance Regulatory Authority should be involved in coordinating the efforts of government departments, insurance companies, intermediaries, NGOs, and learning institutions to provide financial training to both the consumers and the providers of insurance.

How can we tackle Concerns about less awareness on climate change, insurance, and sustainable development?

NGOs and governments can develop and adopt insurance actions in their programs and projects. This will be achieved through training forums. Farmer organizations should deliberate on having insurance training during AGMs and other forums. Every year, world insurance Day (June 28th) is an opportune time to educate farmers on the link between climate change and insurance.

Insurance penetration is very low, especially in developing countries, yet they are mostly affected by climate change. In Kenya, the penetration is just 2.3%, below the global average of 7.3%. Private-Public Partnerships are proving to be successful in tackling the effects of climate change and promoting other forms of insurance. The negative perception of insurance is a major contributing factor to the low uptake of microinsurance in the developing world.

Written by

Shadrack Gor