Nigeria’s agriculture has long been known to hold great promise and has historically been the country’s major source of revenue and foreign exchange earner.
However, farmers face high risks and are particularly vulnerable to unpredictable weather conditions. The impact of climate change is increasingly felt by smallholder farmers who collectively are crucial in feeding the country’s rapidly growing population.
Governments at all levels have been unable to do much to protect them against extreme weather conditions, droughts, and flooding which are becoming increasingly destructive as global temperature rises.
One other troubling offshoot of climate change is increasing conflicts as communities battle over dwindling resources, in particular grazing fields, but also over land rights.
All these highlight the precarious nature of smallholder farmers across the country and the need for crop insurance to help them mitigate the risks.
To ensure farmers aren’t thrown into poverty owing to the impacts, IFC, a member of the World Bank Group signed an agreement with Africa RE, a pan-African reinsurance company headquartered in Nigeria, to help thousands of smallholder farmers in Nigeria to easily access insurance to protect their crops and livelihoods.
Under the agreement, the Africa RE and IFC partnership is expected to help Nigerian insurance companies licensed by Nigeria’s insurance regulator, NAICOM, develop agricultural insurance products, and deepen their index insurance business lines.
These index insurance products will help protect farmers against environmental risks such as drought, floods, erratic rainfall, and other natural hazards.
The perception of risk, coupled with the seemingly lack of reliable insurance has, according to experts, limited efforts to transform agriculture from a subsistent activity to a full-fledged commercial activity which will help to boost Nigeria’s revenue as well as ensure food security.
Ken Aghoghovbia, DMD and COO of Africa Re explained that despite the level of agricultural contribution to Nigeria’s economic growth, the sector is being “hurt by several shocks.
He identified the shocks as flooding, desertification of crop and grazing land, conflicts between herdsmen and local farmers, inadequate access to financing, and low use of modern technology.
Aghoghovbia said these challenges have stifled the sector’s productivity, and created demand-supply gaps in most crops, leading to increased food imports.
Siting an International Trade Administration estimate, he said Nigeria relies on about $10 billion of imports to meet its food production shortfalls.
He said agriculture insurance holds great promise in turning around the fortunes of Nigeria’s agricultural sector.
He stated that in the last five years, agriculture insurance has received considerable attention from investors who have been attracted by the opportunities that stem from the need to commercialise and modernise food production and the quest of the government to diversify the economy.
Agricultural insurance is strategically important for eradicating extreme poverty and boosting food sufficiency.
Agric insurance is therefore a vital instrument for economic development and the modernization of the sector since the associated financial risks can be transferred to a third party.
The benefits are numerous including growing income of farmers and SMEs through commercialisation and access to better technologies, increasing resilience through climate-smart production, risk diversification and access to financial tools, and facilitating the consolidation of farms, assets and production.
Farmers with crop insurance are also more likely to access other financial products, including credit, and to invest in higher-quality production inputs.
“With approximately 70 million hectares of agricultural land and diversity of agriculture enterprises, Nigeria’s agriculture insurance market has the potential to generate a premium of over $600 million,” Aghoghovbia said.
“However, the current market reality paints a different picture. While gross market agriculture insurance premium grew to a peak of $ 15 million in 2021, this figure has declined significantly.”
He blamed the dismal performance on several factors including the non-renewal of the government-supported Anchor Borrowers Program.
He listed others as the misalignment of business goals between various industry players, the lack of investment needed to help stakeholders design and develop agriculture insurance products that respond to the needs of farmers and the realities of Nigeria’s agriculture landscape.
Africa Re is no doubt a leading light in agricultural financing and enhancing the capacity as well as providing technical assistance to insurance firms with an interest in agricultural insurance to empower the farmers with enhanced food production.
Mohammed Aliyu, IFC’s country officer for Nigeria said agriculture is becoming increasingly critical to the Nigerian economy, contributing a substantial 20 percent of GDP.
However, Aliyu noted that the challenges of climate change and other associated risks pose a significant threat to Nigeria’s pursuit of self-sufficiency, import substitution, and development of a competitive agricultural sector.
“The central objective of the Nigeria project is to enhance the resilience of at least 300,000 smallholder farmers through expanded access to climate and agricultural-focused inclusive insurance products,” he said.
The African agriculture insurance market has encountered several challenges that have resulted in the very low penetration levels of this class over the years.
Initially, indemnity-based products were a common feature, and these products became riddled with high costs of administration and the inherent fraud risks made it difficult for To ensure farmers aren’t thrown into poverty owing to the impacts, IFC, a member of the World Bank Group signed an agreement with Africa REunderwriters to implement.
Thus a parametric solution was sought, specifically to encourage the smallholder farmers’ access to insurance at affordable terms. This solution is currently being adopted in many African markets.
Unfortunately, the parametric solution is also encountering many challenges in its implementation. These include high premium rates, high volatility of net account results for risk carriers, low institutional capacity and limited reinsurance capacity.
To address these challenges that have impacted the expansion of agricultural insurance solutions across Africa, the IFC’s Global Index Insurance Facility (GIIF) set up an experience account whereby the loss ratios of the net account for local risk carriers would be taken care of up to 75 percent and the excess loss amounts transferred to the GII experience account.
African Reinsurance Corporation acts as the fund administrator. The GIIF is a multi-donor program managed by the World Bank Group created to address the scarcity of affordable insurance protection against weather and catastrophic risks in emerging countries.
GIIF is supported by the European Commission, the African, Caribbean and Pacific (ACP) Group of States, the Netherlands Ministry of Foreign Affairs, the German Federal Ministry of Economic Cooperation and Development (BMZ), and the Japan Ministry of Finance.
Experimentally, the pilot phase of the experience account was set up in 2017 for a three-year period which ended in December 2020.
The $900,000 fund covered Nigeria and Zambia and was intended to support the development of weather and area yield index insurance programs in these countries.
The benefits of the experience account to the index insurance portfolios cannot be overemphasized and include protection of risk carrier’s net accounts from adverse loss scenarios whereby they can recover monetary amounts from the fund facility in the event their loss ratios exceed 75 percent.
It will motivate risk carriers to continue writing agriculture businesses as they know they have some cushion in the event of a bad year. This has resulted in an increased number of licensed agriculture underwriters since 2017.