As it works to expand its economy, Ghana has proven that it is open to becoming a fertile testing ground for innovations. Mobile microinsurance is one example that has come out of this forward thinking, as has index insurance, which has the potential to not only boost coverage in rural areas, but also prime the agricultural sector for growth. Index insurance is an innovation that has been gaining the attention of developing countries and funding institutions such as the World Bank. Index insurance is a particularly suitable climate-risk management tool. Thus far, index insurance has proved especially useful for insuring against variations in rainfall affecting harvests, according to a study by the International Food Policy Research Institute (IFPRI).
The country’s pilot project in the developing field of weather index insurance is a joint venture between the Ghana Insurance Association and the German Agency for International Cooperation (GIZ), the latter of which is providing training and technical assistance. At the core of the programme, which began in 2011, is the measurement of rainfall at key times during the growing season. Rain below certain thresholds triggers payouts, and farmers can choose levels of coverage according to their needs. “Our role is to provide training and technical assistance,” said GIZ’s Torsten Schlink, an Accra-based programme manager for sustainable economic development. “Promoting agricultural insurance is the role of government and the insurance sector.”
ADVANTAGES: Index insurance differs from conventional coverage because it foregoes underwriting individual policies in favour of a collective method. When certain conditions are met, all policyholders will receive compensation regardless of individual losses. The strength of this system is that it cuts costs by removing the need to assess risk for each customer at the time of underwriting, as well as the need to send an adjuster to farms to evaluate damage when claims are being processed. It also removes the potential for fraudulent claims by farmers because pay-outs are not based on what individuals say they lost because of weather.
Food security is a priority in Ghana and protecting its harvests from loss helps that goal. One of the main aims of the index insurance scheme is to indirectly increase access to finance for the agricultural sector. Weather-related harvest losses can wipe out farmers’ savings, and banks and rural savings-and-loan outfits perceive them as credit risks. Having insurance helps to combat that perception and will also support the sector’s intermediaries, such as sellers of seeds and other inputs, service providers such as plough operators, and others, as increasing the wealth and financial stability of their customers should also boost their access to credit. The programme may also help attract private investment, another objective, as Ghana wants to move from small-scale farming operations to more organised and better financed ones (see Agriculture chapter).
RISING POPULARITY: Weather index insurance has been available since 2003, and as of 2010 there were 40 offerings in 20 countries, according to the International Fund for Agricultural Development. Of those, eight were on offer in India, five of which were aimed at insuring against natural disasters and the rest were targeted at providing coverage against disruptive weather conditions such as abnormal rainfall, extreme temperatures, excess humidity and high winds. Five of the offerings were considered sustainable and ready to move beyond initial experimental stages. Overall, however, Africa remains underinsured. As of 2009 global agriculture insurance premiums were $19.4bn, with just $100m, or 0.5% of the total, coming from Africa, according to World Bank data.
FINDINGS: Results from a feasibility study carried out by GIZ in 2010 found that $228m in principal food crops are lost to climactic, biological and natural perils every year, roughly 5.5% of output. The northern regions are particularly vulnerable as they are drier.
In May 2011 the Ghana Agricultural Insurance Pool (GAIP) was formed, with 19 general insurers taking part. Ghana’s index insurance is offered through this body, though distribution channels initially are those in direct contact with farmers, such as non-governmental organisations, banks and input suppliers. Pay-outs are made to farmers in an area if it does not rain for 12 days (defined as less than 2.5 mm of rain), as measured by a weather station within 20 km from the insured territory as the harvest will be presumed to have suffered from adverse weather at that point.
CHALLENGES: GIZ’s Schlink said the biggest challenge is access to data, both historical and current. In order to set thresholds and price policies to make index agriculture sustainable and affordable for farmers, and also profitable for underwriters, historical data is used to determine normal levels of rainfall and at what point drier conditions begin to impact harvests. But Ghana’s information collection capacity is poor. The country does not have detailed records going back 20 years, and the areas under coverage now do not have a sufficient number of weather observation posts to ensure that the programme has enough information to sell a truly localised product, Schlink said.
GIZ’s programme includes support efforts such as a 2011 inventory of weather stations and their capacities, but what would really help, according to Schlink, is having more stations. The IFPRI study found inconsistent losses in the past on a district-to-district basis. Other options to get around this problem include area-yield insurance, which entails measuring the output instead of rainfall, and setting a threshold for crop harvests that, if not met, triggers a pay-out. Agricultural index insurance policies are typically sold on a seasonal cycle due to the fact they are tied to harvests. In the 2011 cycle, 3073 farmers signed up, representing a total of 2041 ha of land and an insured value of GHS577,654 ($342,491). Although coverage has spread to some central regions, these figures plummeted in 2012, and participation is expected to have dropped significantly in 2012 due to it being too expensive, Schlink said.
RAISING SUPPORT: Part of the problem is that index insurance needs more local support – from the insurance sector’s marketing strategy, but also from the government in the form of subsidies, Schlink said. It is common in both developed and developing countries for farmers to receive help in paying some of the premiums. This helps facilitate agricultural growth while providing additional benefits – insured fields could mean a government can budget less money for related disaster relief programmes. Subsidies can also be used as a tool to encourage participation by making disaster relief money available at higher thresholds and only to those who have purchased index insurance, according to Schlink. It cites models used in Spain and the US as good examples. In Ghana specifically, subsidies currently aimed at the agricultural sector could be redirected, Schlink said. A fertiliser subsidy programme is seen as ineffective because the inputs do not often get to farmers in time for the planting season, while a subsidy for ploughing tends to result in land overuse.
DISTRIBUTION: Should index insurance take hold in Ghana, the country will have to think about ways in which to distribute the product. One way is through mobile phones. Currently, only life insurance products are sold through this channel in Ghana, but Kenya has a mobile index product that was devised to insure against abnormal rainfall. It is called Kilimo Salama and was launched by a consortium of Switzerland-based Syngenta Foundation for Sustainable Agriculture, Kenyan insurer UAP Insurance and the country’s largest mobile carrier, Safaricom. In this programme, sellers use smartphones to register buyers, and transfer money using Safaricom’s M-Pesa, the pioneering mobile money system. Pay-outs are also sent automatically using this scheme.
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