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Helping the “naturally risk averse avoid risk, a conversation with Rose Goslinga
Article Type: News items From: Disaster Prevention and Management, Volume 20, Issue 1
Small and medium-sized farms in the developing world are especially vulnerable to weather events, putting them at increased risk as the climate changes. The Sygenta Foundation, a Swiss nonprofit, has developed an index-based, micro-insurance program in Kenya called Kilimo Salama (Swahili for “safe agriculture”) to insure the agricultural inputs of farmers in that country, to help them ride out weather-related problems (see related story, above). Syngenta Foundation’s Agricultural Insurance Initiative Coordinator Rose Goslinga spoke with the Natural Hazards Observer about their program.
Natural Hazards Observer: How did the program get started?
Goslinga: We started working in insurance two years ago, with the background of really trying to solve a problem that we were creating ourselves. When you try and advise farmers about how to become more productive, how to intensify, that you need to invest in good seeds, apply fertilizer, that you have to mechanize your farms – basically by doing that you are making farmers take more risk, you are making them spend more money.
Now if they are actually good farmers – and most farmers are hardworking people – they will spend that money, maybe take out a loan even. And if it does not rain, or if it rains too much, or if the weather overall is against them, then your advice has actually taken them backwards rather than forwards.
Farmers are very aware that the weather is a factor that affects them. Therefore they invest less in any case. They are naturally risk averse. They will do a lot of things, like plant different varieties of maize on their land, which is essentially as if you diversify an investment portfolio, but to an extremely low level. If you have one acre, on that one acre you might have six different crops being grown.
Now what we are trying to do is to help them become better farmers through insurance. What we developed was based on index-based insurance. Index-based insurance, I should explain, is a different type of insurance. Rather than assessing losses by a human being going and visiting the farm and assessing the yields, we use a weather station, a fully automated weather station that measures the rainfall in a location, and essentially that weather station would act as a proxy for the experience of the farmers.
There are no farm visits necessary. The weather station will measure the rainfall, too much or too little of it. If it is too little to sustain a crop, or if it is too much so that the crop rots, particularly at harvesting, then the measurements of the weather station trigger a payout—not what happens on the farm.
This is what they call “index-based insurance.” There was a pilot of index-based insurance in Malawi, which proved the concept that you can actually do this We looked at this and said, “Look, in the end, it’s about how does it get to the farmer.” The concept of the weather station, it is very interesting, and you can downscale, but how do you take this product to the farm. So we started developing an idea around insuring farmers using weather stations as part of the technology, but also using mobile phone applications. We developed a mobile phone application to register insurance.
NHO: What were some of the early issues you dealt with?
Goslinga: What we also realized is that to actually sell insurance in Kenya – and frankly even in the developed world—insurance is not the same as credit.
With credit, the bank has to trust you. With insurance, you have to trust the insurer –and particularly in Kenya. I remember in our first pilot, two insurance companies went bankrupt during those three months.
The insurance industry has a very bad reputation. To be called an insurance broker is an insult in Kenya.
You have build trust. You have to build trust that this product that you are selling is actually real. This product that you are selling is a promise. To be able to make that promise, people have to trust you. You have to build trust. You have to have a channel of distribution that has that trust to some extent already. So you cannot use normal insurance agents. What we did is we started using agri-dealers and farmer networks as the distribution partner.
Agri-dealers would sell a bag of seed, and farmers could choose to pay a bit more and insure that bag of seed. We basically developed a mobile application that allowed agri-dealers to do that.
NHO: What does the application do?
Goslinga: An agri-dealer will have a mobile phone – just an ordinary mobile phone, nothing special. The only thing special about it is that it has a camera. It runs a program, Kilimo Salama. The first thing it will be asking the farmer is, “Where are you? Where is the weather station that you want to be represented by?”
The next thing it will ask is, “What do you want to insure?” Do you want to insure fertilizer, seeds, chemicals? Then what it does, the stockist will have a piece of paper with bar codes on it for each insurable product. The camera will scan it and when you press “add,” you will be able to add any quantity. It will show you the basket you want to insure. Then it will calculate a premium for you. Then it will ask for your mobile number. Then you receive an SMS on your phone.
We currently insure up to 12,000 farmers through this system. On the spot, the farmer gets a confirmation; the stockist collects the premium. If there is a payout, they get the payout to their phone again.
Two days ago, we had a payout ceremony in Embu, where we paid out to 135 farmers. There was a 15 percent payout. There was a very minor drought in that area.
In our first year, in 2009, we had an 80 percent and a 30 percent payout. That was the year where it was very dry.
NHO: And how many farmers got those?
Goslinga: That was our first pilot year. We had 200 farmers then. All of them got a payout. Currently, if I had had a drought in certain areas this year, I could have had three or four thousand people getting a payout.
NHO: 12,000 farmers signed up in a year seem like an awful lot. It seems like you have gotten an enthusiastic response. Is that your take on it, too?
Goslinga: We get individual farmers as well as groups. And the larger part of the 12,000 farmers we have now are through groups, basically an organization that wanted to insure drought for its farmers. In sales language, they are a key account.
We are looking for more of those people. We have about 3,500 to 4,000 walk-in customers. I think we are doing good. I think we are doing okay. Obviously, the individuals are more expensive for us to acquire because we have to train them, organize field days and so on, whereas the groups are cheaper for us.
In terms of where we want to go, of course we want more groups and we want more individuals – basically, we want all Kenyan farmers to be insured.
NHO: What do you have to do expand the program? Is the program ready to be scaled up?
Goslinga: It depends on how you do it. There are expensive ways of doing it and cost-effective ways of doing it. Working through groups and farmer organizations is definitely a cost-effective way. Actually going out and convincing each farmer one by one is a less cost-effective way of doing it, and I do not think that will be very scalable.
So we are actively looking toward working with farmer groups, with banks, with other organizations that could serve as aggregators as well as the agridealers that we currently work with, which are a good walk-in channel.
We see two main obstacles for us to scale. First, we need financial education, we need to train farmers on what is insurance. I don’t train farmers on “what is crop insurance?” I train farmers on “what is insurance?” A lot of their first experience in insurance is coming from this product. That means they have to try it. If you buy a new product, you do not insure everything. You insure a small thing, which means the costs outweigh the income in the beginning. So you have reach scale quite quickly, and you have to make sure that people start insuring more, so that in the first year they insure their seeds, in the second year they insure their fertilizer as well. That is how I measure success, essentially, because that starts to make things scalable and financially sustainable.
Apart from the distrust and the lack of knowledge about insurance, the second point is weather stations, and weather data infrastructure. We currently operate about 30 fully automated weather stations. They measure rainfall, wind speed, solar radiation, and are powered by solar cells. Kenya allows us to expand to a lot of areas because there is historical weather data, but we do need an investment in new weather stations to enable us to expand to other areas.
NHO: What is the level of enthusiasm among insurers for this kind of product?
Goslinga: I must say, UAP (a Kenya-based insurance company), our partner, we chose them because they had already started doing agriculture insurance for many large-scale farmers, and they had agricultural know-how within their organization. So While we are on the subject of insurance …
The insurance industry is looking hard at adaptation to climate change. This examination is usually couched in terms of a “common interest” among all stakeholders for “sustainable growth,” but there is a lot of cash involved – a lot of risk that can not currently be quantified.
And not everyone is convinced that insurance will provide much long-term protection against the impacts of climate change – at least not in underdeveloped countries.
A report by the World Wildlife Fund and Allianz, a global financial service provider, found enormous exposure for insurers from only a single hazard resulting from the changing climate – sea level rise. “A global sea level rise of 0.5 meters by 2050 is estimated to increase the value of assets exposed in all 136 port megacities worldwide by a total of $25,158 billion to $28,213 billion in 2050,” according to Major Tipping Points in the Earth’s Climate System and Consequences for the Insurance Sector (knowledge.allianz.com/climate_tipping_points_en.html).
A hurricane hitting New York could result in costs of $1 trillion today and as much as $5 trillion by 2050. Drought, shifting monsoon and rainfall patterns, and other problems are also all growing risks in the insurance field.
And in a “Global Insurance Industry Statement on Adapting to Climate Change in Developing Countries,” several companies and nongovernmental organizations called on nations to “develop a holistic risk management culture, facilitating community, regional and state level loss reduction activities, climate-proofing existing infrastructure investments and putting in place appropriate zoning and building codes and enforcing these – all of which will contribute tangibly to managing risks and loss potential.” They also called for policies that would allow a suitable environment for risk management, including insurance, to get financial services to all levels of society.
The statement cited the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a public-private partnership to limit the impact of hurricanes and earthquakes for 16 Caribbean governments. But another report, this one by the NGO Christian Aid, cited CCRIF as an example of the limitations of insurance in developing countries. While insurance can be useful, it has to be put in a holistic framework.
“At present, CCRIF appears unresponsive to community needs and a poor fit between investment and return,” the report said. “Countries paying premiums for hurricane coverage can experience severe and repeated floods, storm surges and wind damage without qualifying for a CCRIF payout.”
Nonetheless, several agricultural insurance programs in Africa and Asia have shown promise. Micro-insurance in Malawi has proven effective in partially protecting about 1,000 farmers from weather-related crop loss. And a similar initiative in India attracted about 700,000 farmers.
A USAID fact sheet says, “Agriculture is perhaps the most disaster-sensitive sector. Communities that are dependent on agriculture are increasingly vulnerable to harvest losses, destroyed plantations, salinization, and loss of livestock due to disaster and disease. As a sector that is heavily dependent on natural phenomena, largely uninsured and (in India) not technology driven, agriculture can derive great benefit from even minimal investment in disaster preparedness.” they were already open to looking at agriculture.
I would say, every day when getting an insurer to look down-market, which is what you are doing with micro-insurance, it is always a struggle, because you have to convince them to do something they have not been doing before. And there was a reason they were not doing it before. But they are very keen, particularly because the mobile technology really brings down the transaction costs. There are no forms, there is no claims procedure. The transaction cost per farmer and per policy is really, really low. That is one of the reasons why they are enthusiastic.
NHO: Is it suitable for other countries in Africa or elsewhere around the world?
Goslinga: The reason why we are in Kenya is because we know there are a number of reasons why it can work here. A number of things come together really nicely.
We have weather data, which means we can assess the risk. All the risks are reinsured on the international reinsurance market, which makes it easier for UAP to also go into this market. You have weather data, so you can assess the risk. That is not the case in many African countries. As soon as you have a civil war somewhere, the first things to go are observations and weather data.
Manual weather stations have been there for a long time. They are generally kept at churches, farms, research organizations, and meteorological departments. So they are there. But if you have civil unrest, that goes.
It takes a long time for them to start up again, in my experience. So you have a large gap and that does not help much in Africa.
I think Kenya is to some extent an exception because they have very good weather data. There are other countries that have good data. Tanzania has reasonable data. I was working in Rwanda before. They have good weather data up until 1990, after that it is not much. Uganda, not very good either. Malawi has good weather data. Zambia has reasonable weather data. It really depends.
The second thing you have to look at is: are the farmers interested in insurance. Do they have a risk that I can actually cover? We get a lot of demand from farmers who farm tomatoes. They say they want insurance. I ask them, “What do you want to be insured against?” They say, “Well, you know, I get this disease.”
Or farmers say, “I want to be insured against hail.” And I’m thinking, “How can that weather station of mine measure hail? Or measure that disease?”
We are really trying with some diseases, which we think are weather-related. We are experimenting in that.
(Natural Hazards Observer, November 2010)