Role of agriculture insurance in African development

As African governments strive to leverage on agriculture to improve the economic fortunes of their people, the insurance industry would be expected to make significant contributions by designing products that take care of the risks associated with agriculture.

Suffice it to say that a well-developed and functional agriculture insurance market can contribute to thedevelopment of the agricultural sector. In fact, as a risk management tool, agriculture insurance provides financial protection against losses caused by natural perils such as drought, flood, hail, frost, excessive moisture and pests.

Agriculture insurance is therefore a vital instrument for economic development and the modernization of the agricultural sector since the associated financial risks can be transferred to a third party.

Furthermore, agriculture insurance can assist farmers get access to credit facilities from financial institutions which consider the agricultural sector as too risky. Most financial institutions require collateral securities such as land and buildings which most rural small scale farmers usually do not have. Lack of credit facilities inhibits farmers from investing in modern methods of farming that will enable them to expand their agricultural production activities.

Despite the obvious and critical importance of agriculture to African economies and the inherant risk the sector is exposed to, agriculture insurance is not well developed in Africa as in other parts of the world. According to the 2011 World Bank report, it is estimated that the total agriculture insurance premium from Africa was about US$180 million, accounting for 0.7 percent of the global premium income from this sector.

The availability of agricultural insurance in Africa is low, with most countries attempting some pilot programmes (pilots on named-peril crop insurance, index-based crop insurance or livestock insurance) which reach only a limited number of farmers and herders. Only a few countries in Sub-Saharan Africa – Mauritius, Nigeria, South Africa and Sudan are known to provide agricultural insurance on a reasonable scale.

Challenges facing agriculture insurance in Africa

Providing agriculture insurance is quite challenging and with the divestiture of government from insurance companies, privately owned insurance companies are quite cautious or unwilling to offer agriculture insurance. Some of the obstacles that impede the growth and development of agriculture insurance are:

• Lack of insurance culture and limited understanding of insurance products by farmers;

• Moral hazard and risk selection by farmers;

• Limited use of modern farming methods by most farmers

• The possibility of catastrophic events which can threaten the financial stability of insurance companies;

• Land fragmentation characterized by numerous small scale farmers. It is administratively costly to provide insurance services to so many small farmers.

Agricultural insurance is expensive to service, particularly to small and marginal farmers scattered across the countryside. Private insurance companies usually do not have a network with which to reach such scattered potential clients and are reluctant to invest in such networks, given the high operational costs relative to the limited business opportunities;

Conclusion

Agriculture insurance could be a key area of growth in Africaif insurers seize the emerging opportunities arising from the major initiatives taken by African Governments to modernize the agriculture sector. However, as has been noted, a number of challenges confront insurers as they strive to offer the necessary protection. These challenges are not unique to insurers in Africa. They are in fact similar to those faced by insurance markets in identical settings such as Latin America and Asia. For instance, insurance companies in Brazil and India have to contend with such problems. They are however some steps ahead in the effort being made to seek solutions to the problems they face in providing agriculture insurance.

Indeed, the future of Agriculture insurance looks promising. The industry just needs to reposition itself by developing effective risk transfer mediation tools that would support the green revolution and other initiatives African governments are taking to improve the lot of their people, majority of whom reside in rural areas.

Source: Africa Re Magazine.