Micro-insurance – hope for smallholders

There are around 500 million smallholders across the world. They cover more than half of its food demand and provide livelihoods for over two billion people. Unfortunately, rural poverty, undernourishment as well as malnourishment are also concentrated among smallholder farmers. A large proportion of these farmers are not insured against loss of food crops through drought, flooding or plant damage caused by pests or loss of livestock owing to by extreme weather, drought or diseases. Insurance-based solutions as instruments of Disaster Risk Reduction (DRR) will most likely become more important with accelerated risks created by climate change.

The Swiss Agency for Development and Cooperation (SDC) is focusing its support on these smallholder farmers. One way to reduce the risks for smallholders is to introduce micro-insurance to compensate for losses of crop yield or livestock losses. Generally, such insurance systems have to follow three criteria: They must be effective, easily available and payable, and lastly, they need to be sustainable. Currently, only around three per cent of the smallholders are covered by crop or livestock insurance.

Micro-insurance schemes must to be simple and innovative

For smallholder farmers living in poverty, the basic concept of insurance is not attractive. The reason is that farmers believe that insurance schemes only bring a benefit (payment) if a significant negative hazard has emerged, and that this negative event has to be analysed and valued by insurance experts, who in turn could be little reliable and/or corrupt. Hence, for good reasons, smallholder farmers tend to be risk averse and are likely to have a negative mind-frame of insurance schemes. Furthermore, in several Asian and African cultural contexts, there are many smallholders who do not want to comprehend the occurrence of any negative hazard.

How to overcome such limitations?

Obviously, in many of the contexts that smallholders are living in, conventional insurance schemes based on individual farms and effective loss are not an option – neither for the farmers nor for insurance companies. Lack of historical data, difficulty in accessing farmers and low education levels are major limitations for insurance companies to do profitable business.

Index-based insurance schemes have been successfully introduced in smallholder contexts. To overcome some of the fears of farmers, focus is given to collective systems and index-based (objective, measurable indicators such as rainfall, livestock loss) schemes. Hence such schemes pay if indicators have activated a certain trigger, e.g.

• rainfall below or above a certain amount and with a certain rainfall pattern leading to drought or inundation (crop insurance schemes in Central America)
• proportion of livestock death caused by extremely cold weather (Index-Based Livestock Insurance Mongolia)

Index-based insurance schemes have a number of advantages. Firstly, they are cheaper to administer because individual and expensive damage experts who visit individual farmers are not needed. Secondly, insurance data are generated by “neutral” meteorological stations or, in the case of livestock mortality, by municipalities in a collective manner.  Thirdly, generally, farmers receive the payments more rapidly and based on a more objective assessment. This permits smallholders to quickly buy seeds in order to reseed and produce a new harvest or in case of livestock to restock the livestock herd. Hence, Index Based Insurance schemes increase the resilience of smallholder farmers.

Collectively involving smallholders in training and climate change risk assessment is crucial

The introduction of index-based insurance schemes is complex, especially in societies without any experience of insurance tradition. Addressing the risks and lowering the threshold for farmers to invest in insurance group (collective) discussions on risks and the possible impact of climate change is important in generating trust and gradually entering the topic of risk reduction by using effective insurance products.

The Swiss Agency for Development and Cooperation (SDC) is focusing on four approaches to help reduce risks for smallholders:

Index-Based Micro Insurance against flooding, drought, earthquakes and livestock mortality (cold, diseases).
Developing satellite-based data generation – including weather forecasting – to allow the development of new insurance products.
Developing regional insurance schemes to address risks of large dimensions, e.g. African Risk Capacity. A number of African countries collectively pay premiums for hazards that might occur only in a single member country.
Promoting co-operation with Insurance and Re-Insurance companies to tackle high risks and provide insurance coverage by professional insurers.

Felix Fellmann, Swiss Agency for Development and Cooperation (SDC), Bern, Switzerland