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How Africa Re, IFC intervention in agric-insurance is supporting small holder farmers

As the population of the world continues its upward growth, Africa is not left out. This is as the population of the continent is expected to double by 2050, reaching an estimated 2.5 billion people, according to the Economist.

As at Sunday, October 17, 2021, based on the latest United Nations estimates, Africa population stands at 1.381 billion which is equivalent to 16.72 percent of the total world population.

Implications of this are that Africa would continue to be under a lot pressure to feed its rising population amidst expanding economic activities across sectors.

The continent remains a haven of economic development and a hub of evolving commercial activities including mining, oil exploration and manufacturing, financial services, housing and infrastructural development as well as agricultural activities amongst others.

With increasing efforts by different governments and stakeholders in Africa to increase food production through investments in the sector, one can only say that a lot still needs to be done given the growing population.

This therefore accounts for why the recent intervention by Africa Reinsurance Corporation(Africa Re) and IFC (a member of World Bank Group) to help insurance companies in Nigeria and Zambia muster capacity to provide risks management services to small holder farmers has continued to receive commendation from different stakeholders.

Agriculture finance and agricultural insurance are strategically important for eradicating extreme poverty and boosting food sufficiency. The benefits of Agriculture finance and agricultural insurance are numerous including growing income of farmers and agricultural SMEs through commercialization 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 (financing structural change).

At a ministerial roundtable in the margins of the 2016 Korea-Africa Economic Cooperation Conference in Seoul, South Korea, AfDB’s president Akinwumi Adesina said to achieve food sufficiency and turn the continent into a net food exporter, Africa must empower smallholder farmers, who constitute 70 percent of the population and produce 80 percent of the food consumed in the continent.”

In Africa, 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 interest in agricultural insurance in order to empower the farmers with enhanced food production.

Having recognized the importance of food security to the growth of the continent and in demonstration of its leadership position, Africa Reinsurance in March 2019, went into a strategic partnership with IFC (A member of the World Bank Group).

The objective of the partnership is to provide technical support to insurance companies for their agricultural line by using index-based agricultural insurance in order to trigger innovative and more efficient solutions for small farmers, help them mitigate effects of climate change related shocks, protect them against catastrophic losses and access to finance.

Challenges

Unfortunately, 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 underwriters to implement.

Thus a parametric solution was sought, specifically to encourage the small holder 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.

Solution and benefits

In order to address these challenges that have impacted the expansion of agriculture insurance solutions in 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 Global Index Insurance experience account. African Reinsurance Corporation acts as the fund administrator.

The Global Index Insurance Facility (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. (For example, in Nigeria, the number of licensed underwriters has grown from 4 in 2017 to 15 in 2021).

To ensure motivation for risk carriers to provide fairly affordable prices to small holder farmers as well as tailor made products that are attractive. Smallholder farmers can therefore easily access insurance.

Speaking on this development, Ken Aghoghovbia, deputy managing director/COO of Africa Reinsurance Corporation, said “This initiative would certainly go a long way in moving Nigeria towards its goal of food security in line with Africa-Re’s mission to support African economic development“ .

During the last three years, the experience account fund has been triggered twice – in 2019 and 2020. In 2019, two risk carriers, Mayfair Insurance Company (Zambia) and AXA Mansard Insurance Plc (Nigeria) benefitted from the fund following various flood losses that impacted their net account portfolios.

In 2020, the Nigeria market was again hit by flood losses that affected eight local risk carriers on the CBN Area Yield Index Anchor Borrowers Program (Wet Season) for rice, maize and cotton crops. The total market gross claim was N1, 995,487,009 (approximately USD$5M) and the local insurers that covered the risk include Veritas Capital, Leadway Assurance, AIICO Insurance, AXA Mansard Insurance Plc and Royal Exchange Insurance Plc.

Africa Re paid about $1.5 million to the lead insurer as their reinsurance share of the claim and has handed out a total of $827,000 to the local risk carriers from the IFC’S GIIF experience account fund.

With the increasing number of agriculture risk carriers as well as smallholder farmers in need of insurance, coupled with the climate change impacts stemming from erratic climatic conditions worldwide, the future of agriculture and hence food security in Africa is uncertain. It is obvious that the need for wider incentive programs such as the GIIF experience account will be key parameters in mitigating challenges associated with these anticipated scenarios in the future.

The IFC/GIIF fund which Africa Re manages on behalf of the agriculture industry stakeholders aligns well with its mission statement of fostering the development of the insurance and reinsurance industry in Africa.

The former Commissioner for Insurance and CEO of National Insurance Commission (NAICOM), Mohammed Kari, had while launching the scheme in 2019, commended IFC and Africa Re and promised that NAICOM will do everything possible to ensure the success of the scheme and even exceed expectations.

Ken Aghoghovbia said at the launching of the scheme: “We are excited to be partnering with IFC in assisting Nigerian insurers to develop appropriate insurance products to protect smallholder farmers. This initiative would certainly go a long way in moving Nigeria towards its goal of food security and is in line with the Corporation’s mission to support African economic development.”

IFC country manager for Nigeria, Eme Essien said: “60 per cent of Nigerians rely on agriculture for their livelihood. Affordable and accessible risk management tools like index insurance are needed to help farmers mitigate the effects of climate-related shocks, protecting them against catastrophic losses and unlocking access to finance.”

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