Climate change is exacerbating extreme weather events such as drought, floods, crop and animal diseases, and increased pest infestations. Farmers in Africa are particularly vulnerable to these risks, which severely impact agricultural productivity and, consequently, food security and the incomes of small-scale farmers.
With agriculture contributing 16 percent of Africa’s Gross Domestic Product (GDP) and employing roughly 60 percent of the population, the continent’s high dependence on natural resources makes these climate extremes a significant threat to both economies and household livelihoods.
Despite this, only three percent of global climate finance reaches Africa to support mitigation and adaptation efforts.
There is also a considerable protection gap, with a very low percentage of weather-related losses in Africa currently insured.
For instance, during Cyclone Idai in 2019, which devastated Mozambique, Malawi and Zimbabwe, only seven percent of the $10 billion in losses were covered by insurance.
As the frequency and severity of such weather events increase, failing to address this situation will make sustainable development and food security nearly impossible in Africa.
Given these challenges, urgent action is required to build resilience among small-scale farmers. One effective solution lies in the provision of insurance services that can cushion farmers against such losses. The insurance industry, therefore, has a vital role to play in driving both climate change mitigation and adaptation.
However, insurance remains one of the least discussed financial services in many forums, where loans and savings often take precedence. This has contributed to widespread ignorance about insurance in regions like East Africa, which has one of the lowest insurance penetration rates globally—around three percent.
This is in stark contrast to countries like South Africa, where the penetration rate is about 17 percent. The challenges include a lack of awareness and the absence of insurance products that cater for the needs of small-scale business holders and producers, who form the majority.
Agriculture is inherently risky, and insurance claims in this sector are almost certain. Profit insurance companies may hesitate to invest in such ventures unless they are worthwhile, and dealing with individual farmers presents significant administrative challenges, from enrolment to premium collection.
Governments, too, often lack the technical expertise needed to make insurance accessible to farmers. To overcome these challenges, collaboration between governments and the private sector is essential in developing effective insurance products.
Key stakeholders should include insurance companies, data firms, farmer unions, financial service providers and civil society organisations.
Governments can focus on financing capacity-building efforts by utilising existing agricultural extension services, providing premium subsidies, and creating policies that encourage insurance penetration.
Data companies can analyse historical data from satellites to ensure actuarial accuracy and the viability of insurance products. Insurance companies can then underwrite and market these products, while farmer organisations can serve as distribution points.
Financial service providers can offer insurance premium financing or bundle insurance with other financial products. Civil society organisations can play a crucial role in capacity building, aggregating farmer organisations and cooperatives, and lobbying internationally for research and development funding to create viable insurance solutions.
Note-worthy, many African governments have recognised the vital role insurance can play in economic development and food security. This has led to efforts to create more supportive regulatory environments for the insurance industry, focusing on transparency, solvency and consumer protection to build trust.
One notable example is the Uganda Agriculture Insurance Scheme (UAIS), a Public-Private Partnership (PPP) between the government and the private sector.
The scheme, which involves 13 insurance companies licensed to underwrite agricultural insurance in Uganda, offers premium subsidies of 30 percent, 50 percent and 80 percent depending on whether farmers are large-scale, small-scale, or located in disaster-prone areas.
Since its inception, the scheme has recorded a 78 percent growth in the adoption of agricultural insurance. Additionally, loans booked under this scheme have grown, with Ush385.9 billion booked as of June 30, 2020. Maize has been the most insured crop, with poultry being the most insured livestock.
Similarly, in Kenya, the Kenya Livestock Insurance Programme (KLIP) was launched in 2015 as an index insurance initiative, to protect pastoralists against climatic shocks. The government subsidised insurance premiums amounting to Sh167 million, and Sh215 million was paid out to farmers who experienced climate-related losses.
The successes of such schemes underscore the potential of PPPs in providing index-based insurance solutions that enhance farmers’ resilience to climate change. With the right government support and innovative private-sector involvement, index-based insurance can offer a path to sustainable agricultural productivity and food security in Africa.
