Agricultural Insurance

as a Strategy of Reducing Drought-Related Vulnerability

Ideally, the rainy season in Ethiopia begins in June and lingers through August or mid-September. Known locally as keremt, it is during these three months that Ethiopia obtains the chief portion of its total annual rainfall – and serves as a key determinant in the country’s ability to feed its populace and prepare certain items for export.However, it’s no secret that rainfall for two consecutive rainy seasons was meagre in some regions – and that Ethiopia is currently in the throes of a drought plaguing millions of people. Rainfall shortages, the frailty of Ethiopia’s agricultural system and the El Nino weather phenomenon have had a tremendous impact on crop yields that in turn require millions to seek food aid and humanitarian assistance. Here in Ethiopia, the required level of rain during keremt depends on the timing of its onset, cessation and the frequency and length of intervening dry-spells.
This matter of rain and the dearth thereof affects agricultural productivity adversely – and the millions of lives that depend on this productivity. In the past, as is the case now, the country has been ravaged by severe drought, predominantly due to the shortage of rain in its main rainy season. These cyclical rain scarcities pose challenges to pastoralists as well. Because rainfall was sparse throughout much of Ethiopia, animals are dying, since grazing land becomes too dry to produce grass for feeding. For those who rely on cattle for their food and livelihoods, the situation can become especially dire, as is the case for the roughly 8.2 million people who are currently impacted by the drought and are relying on assistance.
Various sources have indicated that although drought is cyclical in the Horn of Africa, the current drought is the worst in more than six decades due to the exacerbating effects of climate change. Because Ethiopian farmers’ productivity is so reliant on the success of keremt, there is great concern regarding the effects that sparse rainfall could bring to the country. With an on-going drought, there are valid concerns that our farmers will not get the desired level of agricultural productivity and will struggle to survive. The drought and food crisis is further compounded by the fact that the usage of modern risk prevention and management, including insurance, is instituted at the lowest stage of development.

Why insurance?
On its own, food aid is unsustainable. What is really needed is a systematic and modern way of managing agricultural risks through insurance as the key mechanism to remedy farmer’s perils during drought. Simply put, insurance can play a huge role in the restitution and support of famers. Therefore, the best way to mitigate negative outcomes is by establishing sound agricultural insurance policies. These policies should grant coverage for risks associated with the rainy season or lack thereof. Among others, these policies could indemnify the insured farmers for losses or reductions on agricultural yields.
Farmers insurance isn’t solely about risk management – policies can help farmers invest in technologies and build capacity in order to weather future hardships, including droughts. According to the Guardian newspaper, “timely insurance pay-outs after crop losses can help farmer’s smooth consumption and prevent the sale of assets. Insurance can also be a catalyser, as lenders will be more likely to extend credit to farmers covered by insurance, allowing them to make productivity-enhancing investments.”
The intensity of agricultural risk varies at the household level in relation to the land’s size, quality and productivity; climatic conditions; and production technologies. Accordingly, the uptake of insurance services in agriculture is generally low compared to other areas of the economy, like the manufacturing, mining and service sectors. The challenge could be the attitude of farmers, who may view insurance as an unnecessary expense rather than an investment to curtail future risks, especially given the small size of their holdings. This usually results from low awareness regarding insurance as a risk management tool for farming-related risks – and these are often not addressed until hardship befalls farmers and it’s too late for insurance interventions.
Currently, farmers in Ethiopia manage various risks through traditional means such as savings, Meredaja and Mahber, all of which are informal social connections and sharing. All of these must be replaced with formal insurance, since the country’s economy is undergoing rapid transformation. As a country where agriculture is a dominant economic activity for more than 12 million people, the potential for agricultural insurance business in Ethiopia is huge.
Consequently, through insurance, the risks for smallholder farmers – who comprise the largest portion of Ethiopia’s agriculture sector – can be better managed, since it’s a sustainable approach to reducing poverty levels on a large scale: A reality that is especially important to deal with during periods of drought.
The agricultural sector in Ethiopia, which continues to be poorly served by commercial financial institutions, has pent-up demand for access to insurance. Profitability can also be guaranteed out of economies of scale. Moreover, the insurance policies for farm-related risks and crops could be adopted to suit the unique conditions and risk exposures of the country.
For prudent risk managers, the current drought means it’s time to make sure businesses, properties and lives have proper insurance protection. Investing in insurance, simply put, is a way to ensure that your business or property is protected from any adversity that is likely to occur during times of drought and meagre crop yields.
According to the annual report released by the Ministry of Finance and Economic Development, the agricultural sector showed a moderate growth rate of 5.4Pct in the 2013/14 fiscal year, as crop production increased by 6.6Pct. The growth in agricultural output was mainly attributed to productivity improvements supported by favourable and productive agricultural development policies. Better productive safety net programmes through the rehabilitation of the environment by strengthening soil and water conservation aided this growth. However, to ensure sustainability among the mechanisms to cope with agriculture and weather-related risks, farmers or policy makers can eye insurance as an alternative tool.
Various insurance policies, such as peril crop insurance, index-based crop insurance, or livestock insurance, can be implemented in Ethiopia. However, it is necessary to make sure that the mechanisms are properly coordinated at the national level in order to get the best results.
To bring the scheme to fruition, the concerted effort of all stakeholders is required – including key government agencies, insurance companies, and farming cooperatives, among others. With the help of insurance, the country can better manage its farmers’ vulnerability and erase the irony of “green drought,” which describes the phenomenon in which people live in hunger even during the greenest time, including the rainy season, due to improper risk management mechanisms.
In times of actual drought, however, the need for support mechanisms is heightened. It’s high time key stakeholders look to agricultural insurance – in all its various forms – to help Ethiopia’s farmers and, by extension, the country, weather the adverse effects of drought in a more efficient and diligent manner.

4th Year • November 16 – December 15 2015 • No. 33