Role of agriculture R&D in supporting farmer insurance programmes
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By Thulasizwe Mkhabela
AGRICULTURE is predisposed to all the vagaries experienced by other businesses in the different economic sectors globally, and as such, the sector deserves similar treatment, particularly when it comes to the provision of risk mitigation solutions such as insurance.
The paucity of suitably packaged insurance solutions for the agricultural sector is worse in Africa. The plethora of small-scale farmers who predominate the space in Africa exacerbates the dire situation. Dealing with a multiplicity of small clients in providing services such as insurance attracts high transaction costs, which act as a deterrent to service providers.
However daunting as the task maybe, it cannot be left unattended if African agriculture is to take its rightful position in the world. African farmers will continue to incur inordinate losses, and many will discontinue farming without such risk mitigation tools.
Sustainable, large-scale and affordable agricultural insurance programmes require innovation and action from the public and the private sectors. The involvement of the public sector is critical to ensure that agriculture insurance programmes meet the needs of small-scale farmers while ensuring the sustainability of financial providers.
In recent years, there has been a tendency to overestimate the role of the private sector in agriculture insurance, particularly in developing countries. There is a need for the roles of the public and private sectors to be clearly defined and given their importance.
Before postulating any solutions to the problem, one needs first to identify the typical market barriers to entry. The market inefficiencies that prevent agricultural insurance solutions from reaching scale include information asymmetries for insurance companies that lack information about the target market; information asymmetries for potential policyholders that lack an understanding of insurance; lack of the infrastructure needed for high-quality, reliable market data; and limited access of insurers to reinsurance capacity.
Public investments to address these issues can enable the sustainable development of agriculture insurance markets. An important area where investment is required is climate and weather data generation and synthesis. The availability of reliable and regular climate data provision, particularly in the face of climate change, is indispensable.
This article seeks to highlight the key areas where the public sector can play a vital role in correcting market inefficiencies, particularly in terms of agriculture research and development. Governments also play a role on the demand side, for instance, by purchasing agriculture insurance to cover their contingent fiscal liability to natural disasters such as drought.
The supply-side public roles can be grouped into five categories: public investments in data; increasing outreach to potential policyholders; investment in reinsurance capacity; providing technical expertise in product development; and creating an enabling legal and regulatory environment.
Governments can play a central role in co-ordinating public and private sector investments in collecting, auditing and managing insurance-quality data, and in making sure that the data is available for private insurers. It typically does not make sense for each insurance provider to install its own weather stations or conduct its own yield measurements, but for there to be one co-ordinated investment in high-quality market data that is available to all insurance providers on standard terms.
In the absence of other providers, governments have a key role to play in the development of such high-quality agriculture data. In addition to the collection and audit of data, governments can play a key role in managing data and ensuring that several market participants have access to data.
For example, the Agricultural Research Council (ARC) in South Africa is aptly placed to play such a role given the extensive experience and data on climate and weather information in the country. Furthermore, ARC has the prerequisite minimum infrastructure in place in the form of an extensive network of weather stations.
It is encouraging to note that there is mounting development to establish suitable insurance instruments that accommodate small-scale farmers in Africa. These endeavours can be broadly categorised into either index-based insurance (IBI) or crop indemnity insurance. IBI is the most promising for African agriculture.
IBI is one of a set of important climate change adaptation mechanisms available to smallholder farmers. It has been shown to be climate smart and to be a viable option for risk reduction for farmers on the continent.
The beauty of the IBI, from the farmers’ perspective, is that it encourages climate smart agriculture, because farmers are paid out according to a particular weather condition taking place that they have been insured against and not necessarily crop/production loss. This is an incentive for climate smart agriculture, because farmers can receive an insurance pay-out and still sell their produce if they have been able to produce even under adverse weather condition.
Dr Thulasizwe Mkhabela is an agricultural economist and is the group executive: impact and partnerships at the Agricultural Research Council.
*The views expressed here are not necessarily those of IOL or title sites